(Repeat for additional subscribers)
June 26 (The following statement was released by the rating agency)
Fitch Ratings has assigned Ryanair Limited's
EUR850m seven-year senior unsecured notes a final rating of 'BBB+'.
The final rating follows a review of the final terms and conditions conforming
to information already received when Fitch assigned the expected rating on 2
The notes, which are guaranteed by Ryanair Holdings plc (RYA; BBB+/Stable), are
part of Ryanair Limited's EUR3bn euro medium-term note programme. The proceeds
of the notes will be used for general corporate purposes, including for funding
Ryanair's upcoming aircraft deliveries, which will support its fleet expansion
and help maintain a low average fleet age.
KEY RATING DRIVERS FOR THE SENIOR UNSECURED NOTES
The notes' rating is aligned with RYA's 'BBB+' Issuer Default Rating, despite
potential subordination to RYA's existing EUR3.1bn of debt, which is mainly
secured by the existing aircraft fleet. Factors supporting the alignment of the
unsecured ratings with the IDR, as opposed to notching down, include the
company's strong overall credit profile and the value of the enterprise relative
to the outstanding debt.
In addition, for asset-intensive entities such as airlines rated 'BB-' and
above, in some cases Fitch uses an unencumbered assets-to-unsecured debt test
ratio of 2x as a threshold for notching down unsecured debt rating from the IDR.
Currently, Fitch estimates RYA has a ratio of unencumbered assets-to- unsecured
debt of around 2x. This primarily includes prospective unencumbered aircraft to
be delivered over the next 12 months, and other group unencumbered assets (spare
engines, etc.), excluding the fairly illiquid Aer Lingus stake. Meeting this
core ratio supports Fitch's assignment of an unsecured rating at the same level
as the 'BBB+' IDR. These calculations conservatively exclude the group's current
EUR3.2bn of unrestricted cash and investments, as well as intangible assets such
as slots and gates.
The alignment of the debt rating with the IDR is further supported by the
potential residual market value in encumbered assets. Pre-paying the loans
related to such partially encumbered assets would increase unencumbered assets.
Fitch estimates that including the residual market value of aircraft whose loans
have amortised down to a loan to value below 40% would drive the unencumbered
assets-to-unsecured debt coverage ratio to nearly 4x.
Fitch notes that it is unusual for an investment-grade issuer to have a capital
structure including such a high level of secured debt and encumbered assets. For
RYA this occurred mainly due to the inexpensive financing available through
Export-Import Bank of the United States (Ex-Im) guaranteed loans. As Ex-Im
funding has become less cost-efficient for strong credits such as RYA, it is
likely that future funding will lead to a substantial increase in unencumbered
assets, further underpinning the alignment of the unsecured rating with RYA's
The debt rating is sensitive to changes in RYA's IDR.
In addition, should RYA be downgraded to 'BBB-' or lower, the likelihood of the
unsecured debt being notched below RYA's IDR would increase if RYA maintains
high levels of secured debt. However, the unencumbered asset test described
above could still apply.
KEY RATING DRIVERS FOR RYA
RYA's low cost advantage and substantial liquidity are key drivers of its
rating. The company's high margins, significant cash generation, and financial
flexibility further differentiate RYA from most airline peers. RYA's solid
capacity for meeting its financial commitments is also supported by the
company's fairly flexible cost structure, low break-even load factor, and robust
hedging programmes for fuel and currencies.
RYA has delivered strong financial results for the past three years despite a
lacklustre demand environment and fairly high fuel costs, and Fitch expects the
company's results to continue to remain strong while it begins taking delivery
of new aircraft over the next five years. The company's low fleet age, fleet
commonality and other elements of it business model also support the ratings.
RYA's financial metrics are generally strong for the rating, with the exception
of gross leverage, but this is offset by low net leverage metrics driven by the
company's large cash position.
Overall, RYA's conservative and simplified business model tempers the impact of
the financial leverage and operating leverage that are characteristic of the
airline industry. The business model is designed not just to achieve
industry-low costs but also to mitigate some of the key risks in the sector. The
company's financial strength, including strong cash liquidity, is a key element
of this low-cost/reduced-risk strategy. RYA's leading cost position, liquidity,
high margins and significant cash generation give it the ability to withstand
the inevitable shocks that periodically hit the airline industry, as well as
fending off competitive threats.
Key rating risks include significant cash distributions to shareholders; some
recent changes to parts of the business model, mainly in the areas of customer
service and distribution; and yield weakness seen in its key markets for parts
of the financial year ending March 2014. Ryanair's revenue profile is also more
seasonal than most of the airlines in Fitch's portfolio. Competitive pressures
are a persistent challenge, including expansion plans of various low-cost/hybrid
airlines, such as Norwegian Air Shuttle ASA and Easyjet plc and a gradual
unbundling trend at the legacy carriers.
The company's growth plan and related capital expenditures over the next five
years is also an item to watch, as is potential longer-term exposure to fuel
price levels and currency exchange rates. Larger changes to the company's
business model, such as an expansion into the long-haul market (unless credit
ring-fenced in a separate entity from RYA), could also be a rating risk. Other
risks for the general airline industry are also concerns, including economic
downturns, debt market conditions, fuel price shocks, war and terrorism, disease
pandemics, and environmental factors such as volcano ash clouds.
Future developments that could lead to a negative rating action on RYA include:
- Adverse changes in RYA's liquidity strategy, unless cash is used to reduce
debt, or in other financial and treasury policies
- EBITDAR margins consistently below 19%
- FFO fixed charge coverage consistently in the 4.5x-5.0x range or lower
- FFO net adjusted leverage consistently above 1.0x
- Long-haul expansion, unless housed in a credit separate from RYA
- Revisions to the company's M&A strategy
The IDR has limited upside potential because of the inherent risks in the
airline industry and the company's shareholder distribution policies
For full details on RYA's key rating drivers and rating sensitivities, see
'Fitch Rates Ryanair Holdings Plc BBB+; Outlook Stable' on www.fitchratings.com.