Moody's And Credit Markets Don't Realize The Risk Associated With AerCap

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Summary

  • Moody’s is understating the credit risk of AerCap Holdings N.V. with their cross-over Ba1 credit rating four notches higher than our fundamental HY2 (equivalent to B2) credit rating.
  • Credit markets are also understating AER’s credit risk with a CDS of 198bps and a cash bond YTW of 3.115%, relative to our 281bps iCDS and our 3.955% iYTW.
  • We rate AER as a much riskier credit because of their consistent material debt maturities and weak recovery rate.
  • In addition, our qualitative analysis highlights that management may be concerned about their ability to manage leverage and improve their liquidity position.

Moody's is understating the fundamental credit risk of AerCap Holdings N.V. (NYSE:AER) with its cross-over Ba1 credit rating. Our fundamental analysis highlights a riskier credit profile for AER since even the combination of their cash flows and cash on hand will not be able to cover their material debt maturities beginning in 2017. Valens therefore rates AER four notches lower at an HY2 credit rating (B2 using Moody's ratings scale). (To register for free access to our corporate credit ratings, please click here.)

In addition, credit markets understating AER's credit risk with a CDS of 198bps and a cash bond YTW of 3.115%, relative to our Intrinsic CDS of 281bps and our Intrinsic YTW of 3.955%.

Cash Flow Profile

We produced a Credit Cash Flow Prime™ chart for AerCap Holdings N.V., as we do for every company we evaluate. The chart provides a far more comprehensive view of credit fundamentals than traditional ratio-based analyses. It shows the cash flow generation and cash obligations related to the credit of the firm, adjusted for non-cash financial statement reporting distortions from GAAP.

The blue line indicates the gross cash earnings (Valens' scrubbed cash flow number) expected to be generated based on consensus analyst estimates and Valens Research's own in-house research team. The blue dots above that line include the cash available at that time while the blue triangles indicate that same amount plus any existing, available lines of credit.

The colored, stacked bars show the cash obligations of the firm in each year forecast. The most difficult obligations to avoid are at the bottom of each stack, such as interest expense. The obligations with more flexibility to defer year to year, such as pension contributions and maintenance capital expenditures, are at the top of the stacked bars. All of the calculations are adjusted for non-cash distortions that are inherent in

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Valens Securities is a boutique research firm with 90+ professionals, housing truly unique, disciplined, and unbiased research systems for equity analysis, corporate credit, and macroeconomic strategy.Valens provides institutional investor clients with various tools designed for each level of the investment process.Sign up for our daily newsletter hereAssociated Accounts: Valens Research provides data to SA contributor Altimetry

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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