Avolon Holdings Ltd.

The stable rating outlook reflects our expectation that Avolon's earnings and cash flow will improve as its airline customers continue to catch up on their lease payments. Similar to other aircraft lessors, we expect Avolon to benefit from increasing demand for narrowbody aircraft as domestic leisure short-haul airline traffic continues to recover. We expect EBIT interest coverage of about 1.3x in 2022 (compared with 1x in 2021) and to improve to the mid-1x area thereafter. We also expect its FFO-to-debt ratio to increase to about 7% in 2022 from 5.4% in 2021 and about 8% thereafter. We could lower our rating on Avolon over the next two years if its: EBIT interest coverage remained below 1.3x; and FFO-to-debt ratio remained

...We do not incorporate debt issued by Global Aircraft Leasing Co. Ltd. (GALC) into our ratings on Avolon Holdings Ltd. Avolon is a 70% owned, indirect subsidiary of Bohai Leasing Co. Ltd. through GALC (neither of which is rated), with the other 30% owned by Orix. GALC is owned by Bohai Leasing, and Bohai is majority owned by a special service trust (which took over HNA Group in its reorganization), with the balance publicly traded. GALC has about $1.85 billion of bonds that mature in September 2024 serviced by dividends paid by Avolon. Thus far, about half of the interest payments on GALC's bonds have been paid in cash and about half payment-in-kind. We believe Avolon is sufficiently separate from GALC and the trust to rate on a stand-alone basis. In November 2018, Orix Aviation, a wholly owned subsidiary of Japanese financial services group Orix Corp., acquired a 30% ownership stake in Avolon. We believe the governance structure revised in connection with the acquisition provides significant...

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