OREANDA-NEWS. Fitch Ratings expects to assign a 'BBB-' rating to Aviation Capital Group Corp.'s (ACG) planned issuance of up to $1 billion of senior unsecured notes. The proceeds from the issuance are expected to be used for general corporate purposes, including the repayment of current outstanding amounts under ACG's corporate revolving credit facility.

KEY RATING DRIVERS

IDRS AND SENIOR DEBT
The proposed note issuance does not affect ACG's Long-Term Issuer Default Rating (IDR) of 'BBB-' as balance sheet leverage is not expected to change materially. Pro forma leverage, as measured by total debt-to-equity is expected to increase to 3.44x from 3.15x at June 30, 2015, which remains within the 3.0x - 3.5x range based on June 30, 2015 financial information. Fitch believes ACG's pro forma leverage is consistent with its current standalone rating profile.

Fitch affirmed ACG's IDR and revised its Rating Outlook to Positive from Stable following a broader aircraft lessor industry review conducted by the agency on Aug. 5, 2015. The affirmations of ACG's IDR and unsecured debt ratings are supported by its solid franchise and competitive position as a global lessor and manager of commercial aircraft, consistent operating cash flow generation, strong funding profile, sufficient liquidity and Fitch's assessment of the ownership by and the strategic relationship with Pacific Life Insurance Company (PLIC, IDR 'A', IFS 'A+') and its parent, Pacific LifeCorp (PLC, IDR 'A-', IFS 'A').

The ratings are constrained by ACG's modestly weaker net spreads relative to peers given its focus on long-duration funding, as well as its monoline business model, which is susceptible to the seasonal and economic cycles of global aircraft and passenger travel demand. While Fitch considers ACG's funding profile as diverse, there remains reliance on less stable wholesale funding sources, which also represents a modest constraint on ACG's overall credit profile.

The Outlook revision reflected improvements in ACG's standalone credit profile, most notably reduced balance sheet leverage appetite, driven by a capital injection of $150 million by ACG's parent and retained earnings growth. Leverage was 3.15x as of June 30, 2015, a material improvement from the historical average of between 4x and 4.5x over the last several years.

The senior unsecured notes are rated 'BBB-', equalized with the IDR of ACG, reflecting sufficient available collateral to support average recoveries in a stressed scenario. ACG's credit profile has benefitted from its direct ownership and demonstrated financial support by PLIC, and its parent company, PLC, as reflected by the one-notch uplift from ACG's standalone IDR of 'BB+'.

Fitch views future support as uncertain, particularly in a stress scenario given limited operational and financial synergies, as well as lack of common branding. That being said, Fitch believes PLC maintains a high level of commitment to ACG, as evidenced by PLIC's capital injection in March 2014 and continued ownership of 100% of ACG's equity, which amounted to $1.66 billion as of June 30, 2015. As mentioned, the Positive Outlook reflects potential upward momentum in ACG's standalone credit profile, as opposed to a change in Fitch's thinking with respect to the likelihood of support being extended to ACG from PLIC.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT
The ratings of the senior unsecured debt are sensitive to changes in ACG's IDR and the level of unencumbered balance sheet assets in a stressed scenario, relative to outstanding debt.

An upgrade of ACG's IDR over the Outlook horizon could be driven by a demonstrated ability to manage leverage toward the lower end of the articulated 3.0x to 3.5x range, provided it is in conjunction with continued improvement in net spread more in line with industry peer averages. Fitch will monitor whether ACG maintains a young and liquid aircraft portfolio consistent with ACG's recent historical average fleet age of approximately six years, a robust level of unencumbered assets, consistent operating cash flow generation, sufficient liquidity and diversity of funding. Positive rating actions could also be driven by more explicit forms of parent support from PLIC.

Conversely, significant deterioration in ACG's operating performance or net margins, or a material decline in operating cash flow generation resulting from a significant weakening of sector or economic conditions could result in negative rating actions. A material shift in current fleet strategy, a sustained increase in balance sheet leverage above 3.5x and/or a reduced commitment by ACG to manage leverage below 3.5x could result in a revision of the Outlook to Stable or ratings downgrades. Ratings could be also downgraded should PLIC's willingness or ability to provide timely support to ACG change.

Fitch expects to assign the following rating:

Aviation Capital Group Corp.
--Senior unsecured debt 'BBB-'.

Fitch reviewed ACG's IDR on Aug. 6, 2015.