S&P Rates Fly Leasing Ltd
Overview — We are assigning a ‘BB’ corporate credit rating to Bermuda-based Fly Leasing Ltd., a mid-tier provider of aircraft operating leases. — At the same time, we are assigning a ‘BBB-’ rating and a ’1′ recovery rating to the proposed $395 million secured term loan of Fly Funding II S.a.r.l. (a wholly owned subsidiary of and guaranteed by Fly). — The outlook is stable, reflecting our view that Fly’s currently subpar credit metrics will improve once the company has generated a full year of earnings and cash flow from aircraft it acquired in October 2011. Rating Action On July 19, 2012, Standard & Poor’s Ratings Services assigned its ‘BB’ long-term corporate credit rating to Bermuda-based Fly Leasing Ltd.
The outlook is stable. At the same time, we assigned a ‘BBB-’ rating to the proposed $395 million secured term loan that Fly’s wholly owned subsidiary Fly Funding II S.a.r.l. will issue. Fly will guarantee the term loan. The recovery rating on the term loan is ’1′, indicating our expectation of a very high (90%-100%) recovery in a payment default. Rationale The rating on Fly Leasing Ltd. reflects inherent risks of cyclical demand and lease rates for aircraft, a substantial percentage of encumbered assets, and the company’s complicated ownership structure. The rating also reflects Fly’s position as a mid-tier provider of aircraft operating leases, and our expectation that the company’s credit metrics will improve as its earnings and cash flow benefit from the October 2011 acquisition of 49 aircraft. Fly assumed approximately $1.2 billion of secured debt in connection with that transaction.
We view Fly’s business risk profile as “fair,” its financial risk profile as “significant,” and its liquidity as “adequate” under our criteria. The management and governance of Fly is complex, although the company’s New York Stock Exchange listing provides transparency for investors. Bermuda-incorporated, Dublin-headquartered Fly is primarily publicly owned (96%), with the balance owned by BBAM L.P. and its subsidiaries. However, Fly owns 15% of BBAM, with Summit Aviation Partners owning the other 85%. Fly lists its equity securities as American Depository Receipts on the New York Stock Exchange. All corporate operations have been assigned to Fly Leasing Management Co. Ltd., which is a wholly owned subsidiary of BBAM L.P. and its subsidiaries. Key members of the Fly management team are also employees of BBAM L.P. That entity, in turn, is owned by Summit Aviation Partners, whose owners are individuals within the BBAM Ltd. management team. The management and ownership profile means that the board’s independent members need to be capably engaged in risk oversight on behalf of all investors.