Air Lease: Credit Perspective For Equity Investors

| About: Air Lease (AL)


Air Lease has a debt of $6.3 billion, but the company can comfortably service debt and leverage is not a worry.

The company's loan-to-value is less than 100% providing scope for further leveraging.

Most of the new aircraft delivery over the next 2-3 years is leased and will result in easy debt financing.

I had written a bullish article on Air Lease (NYSE:AL) on June 25, 2013 and the stock has moved higher by 42% since that coverage. For the second quarter of 2014, Air Lease also had a debt of $6.3 billion and the company's debt has increased from $5.2 billion during the second quarter of 2013.

The company's debt will continue to increase as Air Lease has commitment to acquire 379 aircraft through 2023. In this article, I will discuss Air Lease from a credit perspective for the benefit of equity investors. It is important to analyze if the company's debt is within manageable limits or the debt can trigger a crisis, resulting in decline in the stock price.

The first parameter to analyze from a credit perspective would be the company's leverage and EBITDA interest coverage. Both these ratios will help conclude on the cushion the company has with the current debt levels. Even if the company's leverage is high, a comfortable EBITDA interest coverage would mean that high leverage is not a matter of concern.

The company's last twelve month EBITDA of $882 million gives a leverage of 7.1 considering the current debt of $6.3 billion. On a standalone basis, the leverage seems high, but it is important to analyze the leverage in combination with the coverage. The company's LTM cash interest outflow has been $198 million and this translates into an EBITDA interest coverage ratio of 3.65. This leads to the conclusion that the company's debt is well within manageable limits and Air Lease can comfortably service the debt. This is the first positive point for Air Lease from a credit perspective.

The second important factor to consider from a credit perspective is the debt maturity profile. As of 2Q14, Air Lease had $107 million debt maturing in 2014 and $205 million of debt maturing in 2015. Therefore, Air Lease has no significant debt maturity over the next 16 months. In 2016, the company has $890 million of debt maturity and $1.4 billion of debt maturity each in 2017 and 2018.

I believe that this is not a matter of concern as Air Lease has 55 new aircraft addition in 2014 and 2015. This will further boost the operating cash flow and keep the interest coverage comfortable. As long as debt servicing remains comfortable, Air Lease will not find it difficult to re-finance the existing debt. I expect to see re-financing activity in 2014 and 2015 as interest rates are lower. If the policymakers close in on an interest rate increase, re-financing activity will also accelerate. However, the overall debt maturity profile looks comfortable with significant debt maturity only coming after 2-3 years.

The current debt, debt servicing and debt maturity profile certainly does look comfortable and there are no red flags from a credit perspective. The next important thing to consider is the financing of new aircraft over the next few years. Air Lease needs $2.4 billion for aircraft acquisition in 2015 and $2.1 billion for aircraft acquisition in 2016.

If it is assumed that the aircraft financing is done through debt, the total debt will increase to $11 billion by the end of 2016. For the remainder of FY14 and during 2015 and 2016, the number of aircraft will also increase by 72.

Therefore, by the end of 2016, Air Lease will have a fleet of 279 aircraft and considering the operating cash flow per aircraft in 1H14, the total operating cash flow by the end of 2016 is likely to be in the range of $1 billion to $1.2 billion. Further, the interest outflow at the current rate for $11 billion of debt would be $320 million. Therefore, Air Lease will have a operating cash flow coverage or EBITDA interest coverage in excess of 3 even in 2016. This means that the company is well positioned to increase its fleet through debt financing and still maintain a healthy EBITDA interest coverage.

Air Lease also has a strong liquidity position considering the cash and undrawn credit facilities. As of 2Q14, Air Lease had a liquidity of $1.6 billion. Strong relation with bankers will make it easy for Air Lease to leverage further for delivery of new aircraft. I must also mention here that the average fleet book value as of 2Q14 was $8.3 billion and this translates into a loan-to-value of 82%, giving Air Lease leveraging space. As more new aircraft are added, the LTV is likely to remain below 100%.

The final aspect to discuss is the fact that all the aircraft to be delivered in 2014 and 2015 are already leased and 60% of the aircraft to be delivered in 2016 is leased. This is important as leased aircraft ensures cash inflow and securing debt will be easy for leased aircraft. This also points to the demand for new aircraft and robust industry dynamics.

In conclusion, Air Lease looks healthy from a credit perspective and investors need not worry about the $6.8 billion debt in the company's balance sheet. Even when the debt is expected to increase, Air Lease can comfortably service debt and also comfortably secure debt for its expansion. As industry dynamics remains strong, Air Lease stock will move higher and I am bullish on the stock even after a 42% upside since I first covered the company.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.