I have written my positive opinion on Air Lease (AL, Financial) in the past and I continue to maintain a positive view on the stock from a medium to long-term investment horizon. On Oct. 27, Standard & Poor's 500 announced that it revised its outlook on Air Lease to positive from stable and affirmed all ratings, including the "BBB-" corporate credit rating. Here are the key factors driving the positive outlook and the factors that will keep Air Lease trending higher.
The first positive is that Air Lease still has scheduled delivery of 399 aircraft through 2024. This will ensure that the company’s revenue and cash flow growth sustains in the coming years. While growth will moderate as compared to the last few years, regular aircraft delivery is likely to make Air Lease an attractive long-term cash flow machine.
The second point relates to the company’s recent outlook change by S&P. It is important to remember that Air Lease has witnessed leverage-backed growth in the last few years and will continue to grow backed by leverage. Therefore, credit rating is important as a higher credit rating would help the company lower the cost of debt.
As of 2Q15, Air Lease had total debt of $7.3 billion, but that isn't a concern considering the fact that Air Lease is likely to report FY15 EBITDA of approximately $1.1 billion. With the annual cash interest outflow likely to be approximately $250 million, the EBITDA interest coverage ratio comes to 4.0. Strong interest coverage also justifies the recent revision in outlook.
With 399 aircraft scheduled for delivery through 2024, Air Lease can expect continued increase in debt. However, this will be associated with an increase in EBITDA as aircraft for delivery in the next few years have been largely contracted. In other words, the company’s EBITDA interest coverage will remain healthy even if debt continues to swell.
Another point that supports positive outlook for Air Lease as well as the scope to increase debt is the company’s loan-to-value as of June. For 2Q15, the company’s balance sheet value of flight equipment subject to operating lease was $10.1 billion. During the same period, debt of $7.3 billion implies loan-to-value of 72%, and this provides much needed financial flexibility. Air Lease has scope for leveraging from an interest coverage as well as loan-to-value perspective.
With the change in outlook, I also see the company’s cost of debt declining for new aircraft delivery and for debt refinancing. Air Lease has $950 million in debt maturity in 2016, $1.4 billion in 2017 and $1.0 billion in 2018. While refinancing is not an issue, if the company’s rating outlook remains positive and Air Lease witnesses potential ratings upgrade, the cost of debt will decline for refinanced debt.
This has direct implications for equity holders. I believe that Air Lease will trend higher after the recent change in outlook by S&P and I see the company’s results on Nov. 5 as another upside trigger for the stock.
With Air Lease having contracts with strong counterparties for the long term, I don’t see any revenue visibility risk and the global airlines industry is likely to see better times with strong growth traction likely from emerging Asia.
In conclusion, my opinion is to remain invested in Air Lease for long-term, and I would suggest fresh exposure to the stock if there is broad market correction. Investors should specifically not worry about the company’s debt as it’s unlikely to impact from an equity or credit perspective.
