Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of AerCap Holdings, N.V. (AerCap) and its rated subsidiaries at 'BBB-'.

The Rating Outlook has been revised to Positive from Stable.

Fitch has also assigned ratings of 'BBB-' to AerCap Ireland Capital Designated Activity Company (AerCap Ireland Capital DAC) and AerCap Global Aviation Trust's co-issuance of senior unsecured notes, 'BBB-' ratings assigned to a senior unsecured term loan issued by AerCap Ireland Capital DAC, and 'BBB' ratings assigned to the senior secured term loans issued by Salmon River Export LLC, StratocumulusFunding BV and NimbusFunding BV, which are wholly-owned subsidiaries of AerCap.

These rating actions are being taken in conjunction with a global aircraft leasing sector review conducted today by Fitch, covering nine publicly rated firms. For more information on the sector review, please see 'Fitch Completes Aircraft Lessor Peer Review; Stable Credit Profiles Despite Looming Macro Risks', available at www.fitchratings.com.

The ratings of certain secured financings guaranteed by AerCap were also withdrawn as the obligations have been paid in full.

Key Rating Drivers

The revised Outlook reflects Fitch's expectation for deleveraging to at least 2.7x, over the next 12-18 months driven by consistent operating cash flow generation and modest aircraft sales. Fitch believes execution/integration risk associated with the General Electric Aviation Services (GECAS) transaction has significantly abated as the company has effectively onboarded the GECAS fleet and completed the staff integration. Successful transition of AerCap's portfolio to its target of 75% new technology aircraft by 2024, could also support positive rating momentum for AerCap.

The ratings affirmation continues to reflect AerCap's scale and franchise strength as the world's largest aircraft lessor; access to multiple sources of capital; a predominately unsecured funding profile; relatively consistent operating cash flow generation; a proven track record of integrating large-scale acquisitions, and an experienced management team.

Rating constraints include funding and placement risks associated with the company's orderbook, and above-average exposure relative to peers of less liquid, current-technology widebody aircraft. Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business; vulnerability to exogenous shocks; sensitivity to higher oil prices, inflation and unemployment, which negatively impact travel demand; potential exposure to residual value risk; and reliance on wholesale funding sources.

As of March 31, 2022, AerCap had an owned, managed, and committed portfolio of 3,615 aircraft, engines and helicopters, with a net book value (NBV) of $56.8 billion, making the company the largest global aircraft lessor. The company had good customer diversification, serving approximately 300 customers in 80 countries, with no single customer representing more than 6% of the portfolio by market value, as estimated by Fitch. As of the same date, the two largest geographic exposures were to China and the U.S. representing 16% and 15%, respectively, of the portfolio by market value, as estimated by Fitch, which is consistent with peers.

In 1Q22, AerCap recorded a $2.7 billion impairment charge (5% of NBV), which represented a full write-down of its portfolio that remained in Russia. Fitch views this as a one-time event, and does not anticipate any material impairments going forward. While Fitch considers AerCap's portfolio overall to be relatively liquid, its Tier 1 exposure (representing the most liquid aircraft types) is below the peer average of 81.4%. As of March 31, 2022, the portfolio was comprised of Tier 1 (74.4%) and Tier 2 (13.8%), with an average age of seven years.

An increasing proportion of AerCap's portfolio by market value is expected to consist of new technology aircraft over time, as new orders are delivered and older planes are sold or parted out. This portfolio transition should support demand for AerCap's fleet, improve its asset quality, and support positive rating momentum. AerCap's widebody exposure is comprised of in-demand B787 and A350 family aircraft, representing approximately 80% of the company's widebody portfolio, which reduces the risk of potential impairments in the current environment.

Operating performance in 1Q22 was negatively impacted by the non-cash impairment charge taken on its fleet leased to Russian airlines. AerCap reported a pre-tax loss of $2.3 billion in 1Q22 compared to pre-tax earnings of $265.8 million a year ago. Fitch believes the eventual receipt of insurance proceeds (timing and amount to be determined) will help to eventually offset at least a portion of the impairment charge. Pandemic and/or stagflation-driven impacts on airlines that lead to additional lease restructurings, rejections, lessee defaults and impairments, are watch items and could pressure earnings in the medium-term.

Fitch's calculated leverage (gross debt to tangible equity), which treats AerCap's subordinated debt as 50% equity and junior subordinated debt as 100% equity, amounted to 2.9x as of March 31, 2022. The company plans to maintain a conservative capital policy with a targeted net debt-to-equity ratio (as calculated by the company) of 2.7x. Reported leverage, on this basis, was 2.9x as of March 31, 2022. The stability of operating cash flow generation and relatively conservative assumptions on aircraft disposal underpins the company's deleveraging plan. Fitch believes AerCap could achieve its 2.7x target by YE22, which could support positive rating momentum.

Unencumbered asset coverage of unsecured debt continues to improve, given a reduction in secured debt. Secured debt as a percentage of total assets and unsecured debt to total debt were 15.3% and 78.1%, respectively, as of March 31, 2022. Subsequent to the GECAS transaction, management has articulated a target of secured debt to total assets of not more than 20% (previously 30%), which Fitch believes supports funding flexibility and the maintenance of a robust pool of unencumbered assets.

At March 31, 2022, AerCap had $17 billion of liquidity comprised of cash on hand, committed borrowing capacity, and expected operating cash flow over the next 12 months. These sources of liquidity covered next 12 months of expected capital expenditures and debt maturities of $9.0 billion by 2.1x. Fitch views favorably AerCap's liquidity management and the deferral of near-term purchase commitments, which support strong liquidity coverage in the current environment. Over the medium-term, as manufacture production delays abate, Fitch expects liquidity coverage ratios for aircraft lessor peers to revert, but remain above 1.0x.

Fitch's sensitivity analysis for AerCap incorporated forecasted quantitative credit metrics for the company under the agency's base case assumptions. These included up to 15% cumulative lease deferrals for a six-month period, the default of up to 9% of lessees and up to 30% impairment of the NBV of the fleet.

Fitch believes AerCap would have sufficient liquidity headroom to withstand near-term reductions of cash flows in the base case scenario without breaching Fitch's downgrade liquidity coverage threshold of 1.0x, although Fitch anticipates AerCap would temporarily breach the agency's 3.0x leverage threshold, given impairments taken on the aircraft portfolio in 1Q22, but revert below 3.0x within the Outlook horizon.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Inability to reduce leverage to 2.7x or below resulting from capital returns, impairments or a higher risk appetite; liquidity coverage approaching or falling below 1.0x; and an inability to maintain a fleet profile primarily comprised of highly liquid Tier 1 aircraft, could yield negative rating actions. Negative rating pressure could also arise from pandemic and/or stagflation-driven pressure on airlines, that lead to additional lease restructurings, rejections, lessee defaults and impairments, which negatively impact the company's cash flow generation, profitability, and liquidity position.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Maintaining leverage, as calculated by Fitch, below 2.7x, in combination with a robust funding profile from revolver availability and liquidity coverage well in excess of 1.0x. Differentiated risk management and asset quality performance, including transitioning the portfolio to a greater percentage of Tier 1 to be more in line with peers, could also yield positive rating actions.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The secured note ratings are one notch above AerCap's Long-Term IDR and reflect the aircraft collateral backing these obligations, which suggest good recovery prospects.

The senior secured term loan ratings for Delos Finance SARL, which is a wholly owned subsidiary of International Lease Finance Corp. (ILFC), is equalized with the ILFC's IDR. The secured term loans are secured via a pledge of stock of the subsidiaries and related affiliates and are guaranteed by ILFC on a senior unsecured basis. The ratings on these secured term loans are not notched above ILFC's Long-Term IDR due to the lack of a perfected first priority claim on aircraft provided to support repayment of the term loans.

The equalization of the unsecured debt ratings with AerCap and ILFC's IDRs reflects material unsecured debt as a portion of total debt, as well as the availability of sufficient unencumbered assets, which provide support to unsecured creditors and suggest average recovery prospects in a stressed scenario.

The two-notch differential between the Long-Term IDR and the junior subordinated notes reflects poor recovery prospects in a stressed scenario, due to the subordinated nature of the instruments and the cumulative nature of the coupon in the event of a deferral, which implies a higher probability of loss absorption.

The ILFC preferred stock ratings are three notches below the Long-Term IDR and reflect the deep subordination and going-concern loss absorption nature of the instruments. The guarantee under the ILFC preferred stock only guarantees payment of principal and interest when due in accordance with the terms. Current and deferred interest under the ILFC preferred stock would not be expected to be paid until more senior debt holders are paid in full.

In addition, the going concern loss absorption triggers are viewed by Fitch to be further subordinated to AerCap's junior subordinated notes as reflected by the one notch differential between the two instruments.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The senior secured debt, senior unsecured debt and hybrid debt ratings are primarily sensitive to changes in AerCap's and ILFC's IDRs, and secondarily, to the relative recovery prospects of the instruments.

SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS

AerCap Ireland Capital Designated Activity Company, AerCap Global Aviation Trust and ILFC are wholly-owned subsidiaries of AerCap, and their IDRs are equalized with the Long-Term IDR of AerCap.

SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES

AerCap Ireland Capital Designated Activity Company's, AerCap Global Aviation Trust and ILFC's ratings are primarily sensitive to changes in AerCap's Long-Term IDR and are expected to move in tandem.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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