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Faisal Humayun
Faisal Humayun
Articles (681) 

A Complete Credit Analysis For Air Lease

July 14, 2015 | About:

Air Lease (NYSE:AL), which is in the business of leasing of commercial jet transport aircraft to airlines worldwide, has a market capitalization of $3.5 billion and the company had a total debt of $6.9 billion as of March 2015. There is nothing wrong with leverage-backed growth if key credit metrics for the company remain robust.

With Air Lease having a high leverage and the company expecting further increase in debt in the coming years, this article discusses the company’s credit health. Strong credit position would be a positive signal for equity investors as Air Lease has moved sideways for YTD15 and if credit metrics remain healthy along with strong results, the company will trend higher in the coming quarters.

Leverage and coverage are important to discuss to judge the health of the company and Air Lease had a debt of $6.9 billion as of March 2015 and an EBITDA of $259.2 million for 1Q15. Annualizing the EBITDA, the company’s leverage (debt to EBITDA) comes to 6.7. The leverage seems high, but this ratio alone is not sufficient to conclude that the company’s credit health is not strong.

For the first quarter of 2015, Air Lease had cash interest expense of $62.5 million and this translates into an annualized interest outflow of $250 million. Considering an annualized EBITDA of $1,036 million, the company’s EBITDA interest coverage ratio comes to 4.1. Therefore, even with high debt, Air Lease has a comfortable debt servicing capacity and this is a positive.

For March 2015, Air Lease had an aggregate fleet net book value of $9.5 billion. Considering the company’s debt of $6.9 billion, the company’s loan-to-value comes to 73%. This indicates that the company’s financial flexibility still remains robust.

Since Air Lease is in the business of leasing aircraft for long-term to airline companies globally, the company’s weighted average lease term is also an important credit analysis consideration. As of March 2015, Air Lease had a weighted average lease term of 7.1 years and this implies stable cash flow from lease rentals for the existing fleet for the next seven years. Therefore, the company’s revenue, EBITDA and cash flow is likely to remain robust in the years to come. This will support the company’s debt serving ability, and I expect the EBITDA interest coverage ratio to remain high.

From a cash flow perspective, Air Lease reported an operating cash flow of $210 million for 1Q15 and the company had a capital expenditure of $488 million related to acquisition of new aircraft. I believe that the company’s free cash flow will remain negative in the coming quarters. However, this is not a matter of concern for equity investors or from a credit perspective as the company is still in a high growth stage with a big pipeline of new aircraft through 2023. In 1Q15, the company entered into an agreement with Airbus to purchase 57 additional aircraft, increasing the company’s order book to 411 aircraft.

The important point from a credit perspective is that all the new aircraft scheduled for delivery in 2015 and 2016 are already on long-term lease. This indicates the demand for leasing and the demand will sustain in the years to come with strong aircraft leasing activity likely to come from Asia. Therefore, the new aircraft acquisition will increase the debt, but the EBITDA and cash flow will also increase. The company’s debt servicing will therefore remain strong even with an increase in debt.

Another important point in the credit analysis that is worth mentioning is that the company has increased its revolving credit facility from $2.1 billion to $2.6 billion. The maturity of the credit facility has also been extended from May 2018 to May 2019. This is a positive due to two factors – First, the company’s strong liquidity position makes it well financed for aircraft acquisition and second, the credit facility from 31 institutions backs my overall point that the company’s credit health is strong and will remain strong in the years to come.

As I mentioned above, Air Lease stock has traded sideways in YTD15. I believe that this is a phase of consolidation and investors can use this opportunity to consider fresh exposure to the stock with a long-term investment horizon. Debt should not worry investors as debt is backed with high fleet value and strong lease related cash flows in the years to come.

I must mention that Air Lease also pays a dividend of $0.16 per share. While I don’t expect dividends to increase at a robust pace in the coming years, dividends growth will be strong once the company’s investment program ends. Overall, Air Lease is strong from a credit perspective and worth considering for equity investors at these levels.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.

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