AER - AerCap Holdings

[mjs111]

The $8.2 billion in liquidity is mostly the fully drawn-down revolver, with $1.1 billion of it unrestricted cash.  The revolvers contain covenants that require AerCap to maintain compliance with a maximum ratio of debt/equity, a minimum fixed charge coverage ratio, and a maximum ratio of unencumbered assets to certain financial indebtedness.

 

I didn't see anything in the financials saying what these minimums and maximums were. I was hoping to model how much revenue could decrease before AerCap would trip the earnings-based fixed charge coverage ratio.  Anyone look into this? It seems if AerCap violates the covenant that the revolver isn't revoked, but AerCap is not allowed to make interest payments:

 

The ECAPS contain customary financial tests, including a minimum ratio of equity to total managed assets and a minimum fixed charge coverage ratio. Failure to comply with these financial tests will result in a “mandatory trigger event.” If a mandatory trigger event occurs and we are unable to raise sufficient capital in a manner permitted by the terms of the subordinated debt to cover the next interest payment on the subordinated debt, a “mandatory deferral event” will occur, requiring us to defer all interest payments and prohibiting the payment of cash dividends on AerCap Trust’s or ILFC’s capital stock or its equivalent until both financial tests are met or we have raised sufficient capital to pay all accumulated and unpaid interest on the subordinated debt. Mandatory trigger events and mandatory deferral events are not events of default under the indenture governing the subordinated debt.

 

 

The $8.2 billion in liquidity can cover AerCap's cash expenses for almost 1.5 years by my estimation, but the earnings-based fixed charge ratio covenant may be tripped before then depending on how much revenue gets cut.

 

 

Mike

[pterhx]

The $8.2 billion in liquidity is mostly the fully drawn-down revolver, with $1.1 billion of it unrestricted cash.  The revolvers contain covenants that require AerCap to maintain compliance with a maximum ratio of debt/equity, a minimum fixed charge coverage ratio, and a maximum ratio of unencumbered assets to certain financial indebtedness.

 

I didn't see anything in the financials saying what these minimums and maximums were. I was hoping to model how much revenue could decrease before AerCap would trip the earnings-based fixed charge coverage ratio.  Anyone look into this?

 

I've seen some secondary sources on this but haven't been able to find any primary sources.

 

From VIC write up in Feb 2019:

Take the $4.0 billion unsecured revolver, for example. There are only three real covenants, each of which has meaningful cushion:

• Consolidated indebtedness to shareholder equity – The test level here is 3.75x against a 2.70x actual level in 3Q18
  
• Interest coverage – Minimum of 2.0x against an actual 3.6x in 3Q18
  
• Unencumbered asset test – Book value of unencumbered assets cannot fall below 135% compared to an actual level of approximately 148% at 3Q18
  

 

Here's Jeremy Raper's comments on the revolver covenant (from this write up: https://rapercapital.com/2020/03/09/hard-hats-on-buy-aer-short-boc-aviation/):

the main risk is tripping the EBITDA covenant on the revolver (1.5x on an LTM basis). since this is an LTM test, earnings would have to crater for multiple quarters continually to come close to breaching. ie, they can’t just have one horrible 2Q – which they will have – and violate it. of course, at the end of the day I believe banks would waive this covenant if it come to that since they have nothing to gain by tipping AER and forcing them into a position where they are forced to sell planes into the market at the worst possible time.

 

by that point, of course, I believe we will be almost back to normal (in terms of demand) and thus the crisis will have been ameliorated.

 

 

[Peregrine]

Edward, I'm not saying that your thesis is wrong. But here's a scenario from me.

 

Your arguments are all based on the fact that the lessor is very willing to take all these planes back. But what if they're not really all that eager about it. After then they're stuck with a bunch of planes and no lease revenue. A bunch of these planes will be grounded after all until aviation returns to normal levels.

 

So what if the government comes around and says well you'll have to reduce the lease rates. And if you do then we'll guarantee the leases. Why wouldn't they? If they're committed to paying the airlines' bills to keep them flying may as well do it. So now as a lessor your book goes from shitty airline credits to treasuries. That has to be pretty appealing right about now. Is there enough competence at Treasury right now to pull that sort of a deal? That remains to be seen.

 

Highly, highly doubt the Treasury interferes with airline operations. Their goal (like the goals of governments round the world) is twofold: 1) ensure that the 750k employed in the industry remains largely employed; and 2) ensure that the industry has a liquidity bridge to make it through the current period.

 

As for the lease rates getting reduced - that's a high probability if the airline customer defaults and breaks the lease and the lessor can't easily place the planes elsewhere (which is nigh impossible with all the travel restrictions in place currently). But if the customer doesn't default, lease rents must be paid come hell or high water (though with deferrals in all likelihood). And with governments everywhere seeking to support airlines to avoid a calamitous mass bankruptcy situation that could destroy the industry's funding markets for years thereafter, I don't see a scenario where the entire industry goes bankrupt as realistic. Moreover, everything that we've seen from the domestic airlines so far suggest that they've been accelerating retirements of their older owned planes first and foremost.

 

Getting through the current crisis, you may well see leasing become a bigger percentage of the global fleet, as has happened during previous recoveries. Airlines will emerge having very limited little liquidity or access to capital and will thus seek flexibility by turning to leases. Meanwhile, plenty of the smaller lessors with dubious funding structures and limited resources and pull with OEMs and airlines will have disappeared. This may actually lead to a better leasing environment for the stronger players, which of course would be offset some by lower rates.

[mjs111]

The $8.2 billion in liquidity is mostly the fully drawn-down revolver, with $1.1 billion of it unrestricted cash.  The revolvers contain covenants that require AerCap to maintain compliance with a maximum ratio of debt/equity, a minimum fixed charge coverage ratio, and a maximum ratio of unencumbered assets to certain financial indebtedness.

 

I didn't see anything in the financials saying what these minimums and maximums were. I was hoping to model how much revenue could decrease before AerCap would trip the earnings-based fixed charge coverage ratio.  Anyone look into this?

 

I've seen some secondary sources on this but haven't been able to find any primary sources.

 

 

From VIC write up in Feb 2019:

Take the $4.0 billion unsecured revolver, for example. There are only three real covenants, each of which has meaningful cushion:

• Consolidated indebtedness to shareholder equity – The test level here is 3.75x against a 2.70x actual level in 3Q18
  
• Interest coverage – Minimum of 2.0x against an actual 3.6x in 3Q18
  
• Unencumbered asset test – Book value of unencumbered assets cannot fall below 135% compared to an actual level of approximately 148% at 3Q18
  

 

Here's Jeremy Raper's comments on the revolver covenant (from this write up: https://rapercapital.com/2020/03/09/hard-hats-on-buy-aer-short-boc-aviation/):

the main risk is tripping the EBITDA covenant on the revolver (1.5x on an LTM basis). since this is an LTM test, earnings would have to crater for multiple quarters continually to come close to breaching. ie, they can’t just have one horrible 2Q – which they will have – and violate it. of course, at the end of the day I believe banks would waive this covenant if it come to that since they have nothing to gain by tipping AER and forcing them into a position where they are forced to sell planes into the market at the worst possible time.

 

by that point, of course, I believe we will be almost back to normal (in terms of demand) and thus the crisis will have been ameliorated.

 

 

Thanks!  The two sources don't quite square with each other (interest coverage of 2.0x in the VIC article, 1.5x in Raper Capital's, and both refer to interest coverage, while the company states the covenant is a fixed charge coverage ratio.  I wrote IR to see if they would divulge the ratios.  If I hear back I'll post here.

[Guest roark33]

Let's say the US airlines all get a huge bailout loan that significantly impairs their equity given the terms. Why doesn't DAL, etc, turn around and re-cut the agreements with AER?  Contracts, blah.....

[pterhx]

Thanks!  The two sources don't quite square with each other (interest coverage of 2.0x in the VIC article, 1.5x in Raper Capital's, and both refer to interest coverage, while the company states the covenant is a fixed charge coverage ratio.  I wrote IR to see if they would divulge the ratios.  If I hear back I'll post here.

 

It looks like it's 1.5x per page 49 here: https://www.sec.gov/Archives/edgar/data/1378789/000137878920000004/aercap201920-fxex26.htm

 

Section 8.11.    Interest Coverage Ratio. Not permit the Interest Coverage Ratio on the last day of any quarter of any fiscal year of the Company to be less than 150%.

[Peregrine]

Let's say the US airlines all get a huge bailout loan that significantly impairs their equity given the terms. Why doesn't DAL, etc, turn around and re-cut the agreements with AER?  Contracts, blah.....

 

Just like banks are offering forbearance on mortgages, lessors are offering lease deferrals. That doesn't mean at all that the debt is forgiven - once times get better, they will be paid back.

[mjs111]

Thanks! 

 

Reading the Citibank covenant section, it's only looking for an interest coverage ratio of 1.5, like you said, not a fixed charge coverage ratio, like the 20-F said.  Maybe the smaller Asia revolver is looking for a fixed charge coverage ratio.  The 2019 20-F said the Citibank revolver was $4 billon, expandable to $4.5 billion, and the Asia revolver was $950 million.

 

In 2019 interest coverage was 2.0:

 

($1,340,642+ 1,295,020)/$1,295,020 = 2.04

 

Keeping expenses constant, which isn't so unreasonable since 83% of expenses are interest costs and depreciation and amortization, and AerCap only employs 390 people so probably can't cut too much, this would imply that revenue could drop 14% from 2019 before the revolver interest coverage covenant is breached:

 

$1,295,020 interest cost * 1.5 = $1,942,530 EBIT

 

$1,942,530 EBIT - $1,295,020 interest cost = $647,510 income before income taxes

 

$647,510 income before income taxes + $3,596,698 in 2019 expenses = $4,244,208 in revenue

 

$4,244,208/$4,937,340 = 86% of 2019 revenue

 

 

 

Does that sound right?  That seems like a small margin of error given such a cyclical industry.

 

Looking at 2009, revenue was down 20.2% from 2008. SG&A costs were cut about 10%, partly due to favorable exchange rates, partly due to layoffs. EBIT was only down 16% due to some interest rate hedging stuff they did. I'm pulling these numbers off the original 2009 20-F.  Looks like some of these numbers got restated in later financial statements.

 

 

Mike

 

 

[Peregrine]

Thanks! 

 

Reading the Citibank covenant section, it's only looking for an interest coverage ratio of 1.5, like you said, not a fixed charge coverage ratio, like the 20-F said.  Maybe the smaller Asia revolver is looking for a fixed charge coverage ratio.  The 2019 20-F said the Citibank revolver was $4 billon, expandable to $4.5 billion, and the Asia revolver was $950 million.

 

In 2019 interest coverage was 2.0:

 

($1,340,642+ 1,295,020)/$1,295,020 = 2.04

 

Keeping expenses constant, which isn't so unreasonable since 83% of expenses are interest costs and depreciation and amortization, and AerCap only employs 390 people so probably can't cut too much, this would imply that revenue could drop 14% from 2019 before the revolver interest coverage covenant is breached:

 

$1,295,020 interest cost * 1.5 = $1,942,530 EBIT

 

$1,942,530 EBIT - $1,295,020 interest cost = $647,510 income before income taxes

 

$647,510 income before income taxes + $3,596,698 in 2019 expenses = $4,244,208 in revenue

 

$4,244,208/$4,937,340 = 86% of 2019 revenue

 

 

 

Does that sound right?  That seems like a small margin of error given such a cyclical industry.

 

Looking at 2009, revenue was down 20.2% from 2008. SG&A costs were cut about 10%, partly due to favorable exchange rates, partly due to layoffs. EBIT was only down 16% due to some interest rate hedging stuff they did. I'm pulling these numbers off the original 2009 20-F.  Looks like some of these numbers got restated in later financial statements.

 

 

Mike

 

Debt covenants are highly massaged numbers. Doesn't mean that tripping a covenant automatically triggers a host of different clauses that the creditor will act on. Btw, the interest coverage ratio that they refer to in the document uses EBITDA and not EBIT.

[mjs111]

Ah, you're right.

 

Page 16:

 

“Interest Coverage Ratio” means the ratio of (a) EBITDA of the Company and its Subsidiaries, determined on a consolidated basis, to (b) the sum of Consolidated Interest Expense and cash dividend payments (excluding items eliminated in consolidation) on any series of preferred stock, for each of the items in clauses (a) and (b) above, of or by the Company and its Subsidiaries during the four consecutive fiscal quarters most recently ended for which financial statements have been delivered pursuant to Section 8.1.

 

 

That makes the covenant's definition of the interest coverage ratio in 2019:

 

($1,340,642 + $1,295,020 interest costs + $1,676,121 D&A)/$1,295,020 interest costs = 3.3

 

 

going through the same exercise:

 

$1,295,020 interest cost * 1.5 = $1,942,530 EBITDA

 

$1,942,530 EBITDA - $1,295,020 interest cost - $1,676,121 D&A = -$1,028,611 income before income taxes

 

-$1,028,611 income before income taxes + $3,596,698 in 2019 expenses = $2,568,087 in revenue

 

$2,568,087/$4,937,340 = 52% of 2019 revenue

 

 

It seems like this would allow AerCap to have a year much worse than 2009 from a revenue reduction perspective before the covenant was violated.

 

 

Mike

 

[mjs111]

Interesting snippet from a Wall Street Journal article about how airlines are coping with the crisis:

 

The world’s smaller, more vulnerable airlines are taking more desperate measures. One European airline opted against parking idled planes at one airport after determining creditors could more easily seize the aircraft there, according to a person familiar with the matter. They chose a smaller, more out-of-the way airport instead.

 

“We’re getting many inquiries from airlines about protecting their assets, including protecting from repossession,” said Regina Lee, a managing director at consulting firm Alix Partners.

 

 

source:

https://www.wsj.com/articles/with-coronavirus-shutdowns-airlines-learn-to-manage-without-flying-many-planes-11586100378?mod=hp_lead_pos5

 

 

Mike

 

[adhital]

China air traffic looks to be coming back strong. Perhaps it’s better to ask for more then less, don’t let the crisis go to waste, is the reasons for next 6-12 month gloomy forecast by CEOs.

[Edward]

So what if the government comes around and says well you'll have to reduce the lease rates. And if you do then we'll guarantee the leases. Why wouldn't they? If they're committed to paying the airlines' bills to keep them flying may as well do it. So now as a lessor your book goes from shitty airline credits to treasuries. That has to be pretty appealing right about now. Is there enough competence at Treasury right now to pull that sort of a deal? That remains to be seen.

It is a game of chicken in which the government is always on the losing side as they can't afford to lose the jobs. If it was a negotiation between two companies, I wouldn't be so sure of myself.

 

The leases are often 3-5% of an airline's expenses and frankly it is essential equipment you do not mess with. Like you don't mess with airport slots. Not worth the fuss and potential damage. Much easier to retire old planes and use owned planes less, or even default on older owned but non recourse financed planes.

 

Also consider that the leased asset would always be the ones to get the most use because the Airlines would save the owned planes value first and work the leased planes.

 

Regarding air traffic, China recovered a bit but not that much:

https://www.radarbox.com/statistics/total

 

 

[Edward]

The other danger for an equity holder is the leverage.  If the lease payments are reduced, the equity takes the first hit as you have to pay bond holders first.  The equity is like the equity of a CLO.  Now I think the businesses will be around but the equity may not be worth much.  The key here is how much of a cash flow decline will lead to a 50%, 75% or 100% decline in cash flow for the equity.  Alternatively, these guys may have to raise more equity, if gov’t is going to be the backstop for the airlines.

 

Packer

Personally I think 80-90% of the fleet will be retained by the airlines due to government bailouts. Based partially on previous experience with pandemics and financial crashes. It is pretty hard to make these guys lose a lot of money in my opinion.

[Edward]

A very good summary of the situation by S&P global:

https://www.spglobal.com/ratings/en/research/articles/200325-aircraft-lessors-hit-by-coronavirus-fallout-should-fare-better-than-their-airline-customers-11403369

[elliott]

may be this should go to another thread, but still, possibly of interest  in relation to the airline industry in general:

 

Lufthansa shuts low-cost airline and says aviation won't recover for years

The airline group, which owns national carriers in Germany, Switzerland, Austria and Belgium, said in a statement Tuesday that it will permanently decommission at least 43 aircraft, about 6% of its fleet, and ground its budget airline Germanwings.

https://edition.cnn.com/2020/04/07/business/lufthansa-shuts-germanwings-on-coronavirus/index.html

 

[Edward]

may be this should go to another thread, but still, possibly of interest  in relation to the airline industry in general:

 

Lufthansa shuts low-cost airline and says aviation won't recover for years

The airline group, which owns national carriers in Germany, Switzerland, Austria and Belgium, said in a statement Tuesday that it will permanently decommission at least 43 aircraft, about 6% of its fleet, and ground its budget airline Germanwings.

https://edition.cnn.com/2020/04/07/business/lufthansa-shuts-germanwings-on-coronavirus/index.html

Sounds about right, probably will take 2-3 years to recover as per usual in these situations. Retired aircraft and sluggish production of new ones will make for a tight market in a few years. If everything comes back that is.

[peripatetic]

Norwegian Air (5th largest lessee, 4% of lease income) threw in the towel yesterday. Owners effectively wiped; creditors and lessors kindly requested to convert to equity:

 

https://newsweb.oslobors.no/message/500791

[Edward]

Norwegian Air (5th largest lessee, 4% of lease income) threw in the towel yesterday. Owners effectively wiped; creditors and lessors kindly requested to convert to equity:

 

https://newsweb.oslobors.no/message/500791

"Further, it has been put forward that parts of the lease debt of the group be converted to shares in Norwegian, by way of the respective lessors settling their contribution of share capital in Norwegian by set-off. "

 

It seems to me that the reason they're converting only parts of the lease debt to equity is that they want to retain some of the leased aircraft under the old contracts. Otherwise the leasing company should take the shares,  take back the aircraft, then turn around and negotiate a new contract for the aircraft.

[manuelbean]

Norwegian Air (5th largest lessee, 4% of lease income) threw in the towel yesterday. Owners effectively wiped; creditors and lessors kindly requested to convert to equity:

 

https://newsweb.oslobors.no/message/500791

"Further, it has been put forward that parts of the lease debt of the group be converted to shares in Norwegian, by way of the respective lessors settling their contribution of share capital in Norwegian by set-off. "

 

It seems to me that the reason they're converting only parts of the lease debt to equity is that they want to retain some of the leased aircraft under the old contracts. Otherwise the leasing company should take the shares,  take back the aircraft, then turn around and negotiate a new contract for the aircraft.

 

Good point, but wouldn't those new contracts be done at lower rates? Should we expect a press-release from Aercap sometime soon on this?

[elliott]

interesting turn of events. I think none of us in this long thread had mentioned the possibility of Aercap becoming an airline shareholder due to current circumstances

although I may be wrong - indeed, this might possibly have already happened to Aercap before

[manuelbean]

Any idea why this up 20% today?

[valueinvestor]

Any idea why this up 20% today?

 

Priced for bankruptcy. Seems like bankruptcy risk is off the table as Gilead’s drug shows real promise in treating the infection early.

[chesko182]

my guess is it's related to GE reporting this morning and GECAS numbers not being as bad as people had feared...

 

press release https://www.ge.com/investor-relations/sites/default/files/ge_webcast_pressrelease_04292020.pdf

presentation (slide 15) https://www.ge.com/investor-relations/sites/default/files/ge_webcast_presentation_04292020.pdf

 

From 10-Q: https://www.ge.com/investor-relations/sites/default/files/ge_webcast_10Q_04292020.pdf

 

At GE Capital, the primary effect of COVID-19 pertains to its GECAS business. The COVID-19 outbreak has led to worldwide reduction

of flight schedules and it is difficult to predict its longer-term impact. The resulting pressure on its airline customers had led to GECAS

preparing for redeployments and repossessions, as well as lease modifications in some cases, while continuing to respond to customer

requests for short-term rent deferrals. Continued deterioration in cash flow projections, including current rents, downtime, release rates

and residual assumptions could result in further impairments in the operating lease portfolio. Additionally, the COVID-19 market-related

volatility resulted in higher credit spreads on the investment securities held by our run-off insurance business, which resulted in marks

and impairments taken in the first quarter.

 

As of March 31, 2020, GECAS owned 986 fixed-wing aircraft, of which five with a book value of $0.1 billion were available to lease to

customers (aircraft on the ground). We test recoverability of each fixed-wing aircraft in our operating lease portfolio at least annually.

Additionally, we perform quarterly evaluations in circumstances such as when assets are re-leased or current lease terms have

changed.

 

During the three months ended March 31, 2020 and 2019, GECAS recognized pre-tax impairments of $45 million and $3 million,

respectively, in its operating lease fixed-wing aircraft. The increase in pre-tax impairments was driven by declining cash flow projections

for aircraft as a result of COVID-19 and related market impacts.

 

As of March 31, 2020, GECAS has received deferral requests (primarily short term in nature) from approximately 75% of its airline

customers operating in approximately 64 countries and expects to continue to receive requests for rent deferrals and/or lease

restructures from its global airline customers as a result of COVID-19 and related market impacts. An extended disruption of regional or

international travel could result in an increase in these types of requests in future periods, which could result in an increase to the trade

receivable balance. As GECAS evaluates future lease restructures, there is a risk of lease modifications that could have a material

adverse effect on GECAS operations, financial position and cash flows. Additionally, the portfolio utilization in our helicopter business

was 86% as of March 31, 2020.

[johnny]

Does anybody have a read/take on the new United/BOC leaseback announcement? I'd love to see the terms of that deal.