December 16, 2013 / 2:36 PM / in 4 years

Fitch Places AerCap's 'BBB-' L-T IDR on Rating Watch Negative on Proposed Acquisition of ILFC

(The following statement was released by the rating agency) NEW YORK, December 16 (Fitch) Fitch Ratings has placed AerCap Holdings N.V.'s (AerCap) 'BBB-' long-term Issuer Default Rating (IDR) on Rating Watch Negative. A full list of rating actions follows at the end of this press release. Today's action follows AerCap's announcement that it has entered into a definitive agreement to acquire International Lease Finance Corp. (ILFC; 'BB'/Rating Watch Positive). Fitch expects to resolve the Rating Watch Negative once the acquisition is completed, which is expected to be in the second quarter of 2014. Assuming the transaction is consummated on the agreed-upon terms, and absent material credit developments in the interim, it is expected to result in a one-notch downgrade of AerCap's long-term IDR to 'BB+' at the time of close. ILFC's 'BB' IDR has been placed on Rating Watch Positive today by Fitch and is expected to be upgraded by one notch to 'BB+' at the time of the transaction's close. Thus, Fitch's expectation is that the ratings of the two entities will ultimately be equalized. AerCap has agreed to acquire 100% of ILFC from American International Group (AIG; 'BBB+') in a cash and stock transaction. The purchase price is approximately $5.4 billion, including $3 billion in debt and cash and approximately $2.4 billion in newly issued AER shares. AerCap is expected to be the surviving entity after the acquisition is completed, and AIG is expected to initially own approximately 46% of the combined company. AerCap has obtained a commitment from UBS and Citi for a $2.75 billion acquisition facility. Upon closing of the acquisition, AIG will provide AerCap with a committed $1 billion 5-year unsecured revolving facility. The acquisition is subject to regulatory and shareholder approvals. ILFC's existing deferred and current tax liability (DTL), which totaled approximately $4.5 billion as of Sept. 30, 2013, is expected to be transferred to AIG as a result of purchase accounting and section 338(h)(10) tax election. Fitch believes this is an important element of the transaction, as it will allow AerCap to transfer ILFC assets to a more tax efficient jurisdiction and provide the company with flexibility to sell and/or part-out aircraft without incurring cash taxes. The company expects to generate significant tax savings by transferring ILFC assets to an entity domiciled in Ireland. KEY RATING DRIVERS Today's rating action and the expected one-notch downgrade of AerCap's IDR upon closing of the acquisition are based on the following credit concerns: --Material amount of execution and integration risk, as ILFC is approximately four times larger than AerCap; --Increase in tangible balance sheet leverage, heightening sensitivity to a market stress or a cyclical downturn; --The acquisition represents a major change in strategic direction for AerCap; --AER's average fleet age will increase by over two years; --Large order book increases funding risk, which is partly mitigated given attractive prices and delivery slots. The risks outlined above are partially mitigated by the following factors, which Fitch views favorably: --The markdown of ILFC's fleet reduces risk of future impairments, supports the quality of the equity base, and allows more flexibility to sell or part out older aircraft; --Fitch expects AerCap to reap tax benefits from elimination of the DTL and re-domiciling of ILFC assets to a more tax favorable jurisdiction; --AerCap's pro forma balance sheet would benefit from a significant unsecured funding component; --Cash flow leverage and coverage measures are not expected to change materially from ILFC's current levels; --Potential for post-integration operational and cost efficiencies for combined firm. AerCap's balance sheet leverage will increase materially, primarily as a result of acquisition-related purchase accounting. Therefore, AER's credit profile will initially become riskier, but Fitch expects it to improve over time as the acquisition is integrated and equity is built up through retained earnings. The 'BB+' rating would be supported by the company's plans to maintain a conservative capital policy with no dividends or share repurchases until reported debt-to-equity is reduced to approximately 3.0x. Fitch believes the combined business offers fairly good visibility into future earnings and operating cash flows, which underpins the company's de-leveraging plan. Fitch believes that the best measure of financial leverage for the combined company is tangible debt-to-tangible equity. This measure adjusts for certain accounting assets and liabilities that will be created as a result of purchase accounting, and is more reflective of the economic value of the balance sheet than the reported debt-to-equity ratio. Some of the adjustments include the fair value (FV) adjustment to ILFC's debt, the FV of the order book and the lease premium. Fitch calculates that initially, the tangible debt-to-tangible equity will be approximately 8.7x, much higher than the reported pro forma leverage figure of 5.2x. However, the two measures are expected to converge as the purchase accounting adjustments get accreted over time. The acquisition will involve significant integration efforts, consuming meaningful time and effort of AerCap's senior management team. AerCap's balance sheet will increase by approximately a factor of four. In Fitch's view, the acquisition brings a significant amount of integration and execution risk as AerCap transfers ILFC's fleet and ILFC's staff onto AerCap's platform. These risks are mitigated to some extent by AerCap's scalable operating platform (including its interest in AerData), the relatively small number employees at ILFC, overlapping locations of regional offices and prior ownership of the AeroTurbine platform which will be reacquired as part of the transaction. Fitch believes that the acquisition would result in a significant shift to AerCap's current business strategy. The size of the fleet will rise dramatically to approximately 1,200 aircraft from 231 as of Sept. 30, 2013; and its average age will increase by roughly two years, to over seven years from 5.4 years as of Sept. 30, 2013. AerCap will become the owner of the largest order book in the industry when the transaction is consummated. Fitch recognizes that ILFC's orders represent some of the most in-demand aircraft in the market and were placed at attractive prices and delivery slots. However, the long-term nature of the commitments creates a liability that may need to be funded at a time when capital is not readily available. Furthermore, given the cyclical nature of the aviation market and continual technological advances, the contracted purchase price of the aircraft could potentially exceed the market value on the delivery date. Despite the concerns cited above, Fitch believes that the acquisition offers potential long-term strategic benefits for both AerCap's and ILFC's creditors. The economics of the combined business are expected to remain intact, with no immediate impact to lease cash flows and a modest increase in the debt balance to fund the cash portion of the purchase price. AerCap expects to reap significant tax benefits by re-domiciling all of the assets to Ireland and leaving the significant DTL with AIG. The acquisition will significantly expand AerCap's access to unsecured funding, which will represent approximately 60% of total debt on a pro forma basis. Furthermore, AerCap will acquire a large pool of unencumbered aircraft, which will provide support to unsecured creditors. Upon closing of the acquisition, Fitch expects to equalize the company's unsecured debt with its long-term IDR because it will represent a significant part of the capital structure. Based on liquidity management plans articulated by AerCap, Fitch believes AerCap's liquidity profile will improve from recent levels and will be adequate to support upcoming debt maturities and purchase commitments. RATING SENSITIVITIES Fitch believes positive rating momentum is possible over the longer-term if AerCap executes on the plan it has outlined. More specifically, successful integration of ILFC's fleet and staff, a reduction of balance sheet leverage as outlined by the company, maintenance of robust liquidity and improvement in the fleet profile are viewed as positive rating drivers. Positive rating momentum could stall if AerCap runs into any meaningful integration issues, if dividends or share repurchase activity are reinstituted before deleveraging plans are completed, or if there is a material downturn in the aviation sector, which negatively impacts its business. Downside risks to AerCap's ratings will be elevated until the acquisition is integrated and leverage is reduced. Negative rating actions could result from significant integration issues, loss of key airline relationships, deterioration in financial performance and/or operating cash flows, higher than expected repossession activity and/or difficulty re-leasing aircraft at economical rates. Longer-term, aggressive capital management, a reduction in available liquidity or inability to maintain or improve the fleet profile could also lead to negative rating pressure. Failure by AerCap to obtain any of the necessary amendments and covenants on ILFC's credit facilities on reasonably economic terms could adversely impact the combined entity's credit profile. This also applies to any other contractual agreements of ILFC that have Change of Control or similar provisions. Fitch has placed the following ratings on Rating Watch Negative: AerCap Holdings N.V. --Long-term IDR 'BBB-'. AerCap B.V. AerCap Dutch Aircraft Leasing I B.V. AerCap Dutch Aircraft leasing IV B.V. AerCap Dutch Aircraft Leasing VII B.V. AerCap Engine Leasing Limited AerCap Ireland Limited AerCap Note Purchaser (IOM) Limited AerCap Partners I Limited AerCap Partners 767 Limited AerFunding 1 Limited Flotlease MSN 973 Limited Genesis Portfolio Funding 1 Limited GLS Atlantic Alpha Limited Harmonic Aircraft Leasing Limited Melodic Aircraft Leasing Limited Philharmonic Aircraft Leasing Limited Rouge Aircraft Leasing Limited Sapa Aircraft Leasing 2 BV Sapa Aircraft Leasing BV SkyFunding Limited Symphonic Aircraft Leasing Limited Triple Eight Aircraft Leasing Limited Wahaflot Leasing 3699 (Bermuda) Limited Westpark 1 Aircraft Leasing Limited AerCap Ireland Funding I Limited AerCap Leasing 946 Limited Cielo Funding Limited Harmony Funding BV Parilease / Jasmine Aircraft Leasing Limited Worldwide Aircraft Leasing Limited Skyfunding II Limited --Senior secured bank debt 'BBB'. Fitch has affirmed the following rating: AerCap Aviation Solutions B.V. --Senior unsecured debt rating 'BB+'. Contact: Primary Analyst Ilya Ivashkov, CFA Director +1-212-908-0769 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Brendan Sheehy Director +1-212-908-0138 Committee Chairperson Nathan Flanders Managing Director +1-212-908-0827 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Finance and Leasing Companies Criteria' (Dec. 11, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'Fitch Places ILFC's IDR on Rating Watch Positive on Proposed Merger with AerCap' (Dec. 16, 2013). Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Finance and Leasing Companies Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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