MACQUARIE GROUP LIMITED
Fitch Ratings has assigned 'BB' Long-Term Issuer Default Ratings (IDRs) to
The Rating Outlook is Stable. Fitch has also assigned
Key Rating Drivers
MAHL's ratings reflect its moderate position as a global lessor of commercial aircraft, appropriate current and targeted leverage, absence of material orderbook purchase commitments, long-term equity investments from
Rating constraints include near-term integration risks associated with the portfolio acquisition from ALAFCO Aviation Lease and Finance Company K.S.C.P. (ALAFCO) and longer-term execution risks associated with the company's aggressive, albeit potentially attainable growth and accompanying financing objectives. Additional rating constraints include elevated exposure to older aircraft relative to Fitch-rated peers, the use of sale-leaseback agreements to supplement portfolio growth from its orderbook, which is a highly competitive market in the current environment, a weaker earnings profile, a notable amount of upcoming lease maturities, and a largely secured funding profile.
Fitch also notes potential governance constraints relative to larger, public peers including lack of independent board members and partial ownership by pension funds.
Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business; vulnerability to exogenous shocks; potential exposure to residual value risk; sensitivity to oil prices, inflation and unemployment, which negatively impact travel demand; reliance on wholesale funding sources; and meaningful competition.
Fitch views MAHL's asset quality as weaker than peers given the older, current technology portfolio, with a weighted average (WA) age of 12 years, which is amongst the oldest compared to Fitch-rated peers. In the nine-months ended
The ALAFCO transaction is expected to increase diversification and scale, reduce the WA age and improve portfolio liquidity, which Fitch would view favorably. The expected reduction in the average age, in line with management's target of below 10 years, would be more in line with rated peers.
Fitch anticipates that MAHL's aggressive growth strategy and the use of sale-leaseback agreements, will have a negative impact on near-term profitability. Fitch expects the company's annual pre-tax returns on average assets will remain below 1% over the Outlook horizon, which is commensurate with Fitch's 'b and below' category earnings and profitability benchmark range for finance and leasing companies with an operating environment score in the 'bbb' category.
Fitch believes operating performance could also be pressured in the near-term given the amount of upcoming lease maturities, as the WA remaining lease term was only 3.7 years, increasing remarketing needs. The lengthening of the lease maturity profile to 5.6 years, proforma for the ALAFCO transaction, would be viewed positively by Fitch, particularly if accompanied by higher net spreads.
The company has articulated a leverage target, on a gross debt to tangible equity basis, of 3.0x. Fitch believes MAHL's leverage target is appropriate in the context of the liquidity of the fleet profile, as 61.9% of the portfolio (74.6% proforma) is considered tier 1, which is relatively consistent with peers.
As of
Fitch anticipates that MAHL will have solid near-term liquidity, including
Fitch's sensitivity analysis for MAHL incorporated quantitative credit metrics for the company under the agency's base case and stress case assumptions. These included slower than projected growth, lower aircraft disposal gains, additional equipment depreciation, higher interest expenses, and additional impairment charges. Fitch believes MAHL would have sufficient liquidity headroom relative to the threshold of 1.0x to withstand near-term reductions in operating income in both scenarios. Fitch expects MAHL would retain sufficient capitalization headroom relative to the 4.0x downgrade trigger under both scenarios.
The Stable Rating Outlook reflects Fitch's expectation that MAHL will manage its balance sheet growth in order to maintain sufficient headroom relative to its leverage target and Fitch's negative rating sensitivities over the Rating Outlook horizon. The Stable Rating Outlook also reflects expectations for the maintenance of impairments below 1%, enhanced earnings stability, and a strong liquidity position, given the lack of material orderbook purchase commitments with aircraft manufacturers and the impact of the ALAFCO acquisition.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Macroeconomic and/or geopolitical-driven headwinds that pressure airlines and lead to additional lease restructurings, rejections, lessee defaults, and increased losses would be negative for ratings. A weakening of the company's long-term cash flow generation, profitability, and liquidity position, and/or a sustained increase in leverage above 4.0x would also be viewed negatively.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
MAHL's ratings could be, over time, positively influenced by solid execution with respect to planned growth targets and outlined long-term strategic financial objectives, including maintenance of leverage below 3.0x and achieving a sustained pre-tax return on average assets above 1.5%. Ratings could also benefit from enhanced scale and an improved risk profile of the portfolio, as exhibited by the successful integration of the expected ALAFCO transaction, in addition to reduced exposure to weaker airlines, maintenance of an impairment ratio below 1% and increases in the proportion of tier 1 and new technology aircraft.
An upgrade would also be contingent upon the lengthening of the WA lease profile and a reduction in the WA age of the fleet more in line with larger, Fitch-rated peers, and unsecured debt approaching 40% of total debt, while achieving and maintaining unencumbered assets coverage of unsecured debt in excess of 1.0x.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The senior secured debt ratings are one-notch above MAHL's Long-Term IDR and reflect the aircraft collateral backing the obligations, which suggest good recovery prospects.
The senior unsecured debt ratings are equalized with MAHL's Long-Term IDR, reflecting expectations for average recovery prospects in a stress scenario given the availability of unencumbered assets.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The senior secured debt ratings are primarily sensitive to changes in MAHL's Long-Term IDR and secondarily to the relative recovery prospects of the instruments.
The senior unsecured debt ratings are primarily sensitive to changes in MAHL's Long-Term IDR and secondarily to the relative recovery prospects of the instruments. A decline in unencumbered asset coverage, combined with a material increase in secured debt, could result in the notching of the unsecured debt down from the Long-Term IDR.
SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS
The Long-Term IDRs assigned to
SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES
The ratings assigned to
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 '
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
RATING ACTIONS
Entity / Debt
Rating
LT IDR
BB
New Rating
senior unsecured
LT
BB
New Rating
senior unsecured
LT
BB(EXP)
Expected Rating
senior secured
LT
BB+
New Rating
LT IDR
BB
New Rating
senior unsecured
LT
BB
New Rating
LT IDR
BB
New Rating
senior secured
LT
BB+
New Rating
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Additional information is available on www.fitchratings.com
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