Fitch Ratings has assigned a 'BB' Long-Term Issuer Default Rating (IDR) to
The Rating Outlook is Stable. Fitch has also assigned 'BB+'/'RR2' ratings to the company's proposed senior secured revolver, term loan, and notes.
Atlas's IDR is supported by its contracted service offerings representing about 85%-90% of block hours in 2022 with terms that set pricing and minimum activity levels. Atlas also has a fleet of over 100 aircraft (48 aircraft within the collateral pool) that allows it operational and end-market flexibility. Leverage and coverage metrics are generally consistent with the rating level and supported by mandatory amortization on aircraft financings.
The ratings also reflect the softening outlook for the company's operating environment, as it comes off peak levels, and the impact on FCF that contract renewals and spot rate exposure have in a declining rate environment. Atlas also operates in a highly competitive environment due to similar service offerings and broad geographic reach of industry peers, as well as alternative transport options.
Key Rating Drivers
Contracted Flights Moderates Rate Exposure: About 85% of revenues are contracted under multi-year agreements, which can last up to five or more years. Around 10%-15% of block hours are subject to renewal or market spot rates over the next five years. Contracts set long-term pricing with fuel cost pass-throughs, which moderates fluctuations in air cargo rates and margins, and minimum flying levels. Susceptibility to air cargo rates are limited to ad-hoc flying and long-term contract renewals that combined make up roughly 20% of block hours per year.
Fitch does not believe there's a meaningful risk of contract cancellations through a rate cycle due to the high penalties for breaking contracts. Atlas's fleet has been operating well above minimum contracted flying levels, but Fitch recognizes the company could reposition aircraft with other customers if utilization drops.
Operating Conditions Softening: Fitch expects air cargo conditions, and as a result rates, to peak in 2022. A softening in rates over the next two to three years reflect weaker global economic conditions and a recovery in bellyhold capacity of passenger aircraft though the reopening of
Fitch will watch the evolution of block hour rates over the next few years given decreases in rates directly affect contract renewals, spot business and cash flow generation. Fitch forecasts that EBITDA contribution from the eight new aircraft and cost saving initiatives will be largely offset by declining rates, leading to relatively flat EBITDA in the
Financing-Directed Capital Deployment After 2023: Subsequent to taking delivery of the new B777 and B747 aircraft, management indicated that new aircraft purchases and M&A are unlikely over the next few years. Fitch does not currently assume further new aircraft purchases or M&A through the medium term but believes fleet investment is likely over the long-term to replenish the fleet. The company has indicated an intent to pay down debt, and has the opportunity to do so via amortization of the rollover aircraft-secured debt. It also intends to pay annual dividends of about
Contracts, PIK Support Financial Flexibility: Fitch expects FCF generation to be consistently positive after 2023 and at a level that supports maintenance capex, assuming no unannounced aircraft purchases, mandatory debt amortization and full distributions of about
Fitch's FCF forecast is based on annual EBITDA of
Fitch also considers the impact of LTV levels on liquidity. In order to draw 50% or more of the
Low-3.0x Leverage Improving to Mid-2.0x: Debt/EBITDA and adjusted debt/EBITDAR are expected to be about 3.2x in 2023, before declining to the mid-2.0x range through the intermediate term assuming no new aircraft purchases or M&A. The forecasted run-rate level is moderately below 2022 expectations of 2.8x and generally consistent with 'BB' rating category tolerances. The scheduled amortization on roll-over aircraft debt is expected to lead to debt repayment of generally
Flexible Service but
Aircraft Lessor Considerations: Even though Atlas offers dry leasing services, which are akin to traditional aircraft lessors, the contribution from the business is relatively small at roughly 5% of revenue. Fitch does not anticipate the company shifting its service mix to focus on growing the dry lease segment. As an operator of a cargo airline, Atlas carries relatively higher operational risks than typical aircraft lessors.
Fitch also considers the relatively older, less liquid fleet with an average age of about 20 years compared with lessor averages of five years, though Fitch acknowledges that air freighters typically have longer operating lives. Further, Atlas's fully secured capital structure constrains financial flexibility relative to most lessors rated in the 'BBB' category which typically reflect a lower level of balance sheet encumbrance.
New Debt rated 'BB+'/'RR2': The ratings on the senior secured revolver, term loan and notes reflect Fitch's estimates on the recovery value of the 48 aircraft, equipment and other assets that collateralize the facilities and notes. Fitch also considers projected depreciation rates for the aircraft that outpace expected term loan amortization of 1% per year. The new credit facilities and notes are structurally subordinate to the existing aircraft-secured debts, which are borrowed under various subsidiaries and do not carry cross or downstream guarantees. The credit facilities receive a guarantee from
Derivation Summary
Compared with other cargo airline,
Lingering impacts of pandemic-driven shutdowns and lower demand, along with the recent rise operating costs have pressured many passenger airline ratings. Fitch considers the liquidity and financial flexibility on the passenger airlines to manage through the recovery period. Fitch expects
Aircraft lessors generally do not operate aircraft, a characteristic that fundamentally lowers operating risks such as air cargo rate exposure, operational efficiency and maintenance compared to Atlas. Atlas's aircraft are also relatively older than other rated aircraft lessors' and are fully encumbered by various aircraft financing arrangements and the proposed debt. While Debt/Equity in the mid-3.0x range is similar to other Fitch-rated aircraft lessors, these entities typically benefit from a better underlying asset quality and portfolio diversification.
Key Assumptions
Revenue, excluding fuel, is somewhat steady around
Similarly, EBITDA is fairly steady around
No new aircraft purchases are assumed after 2023 leading to annual capex in the low
Capital deployment after 2023 is focused on annual debt amortization and preferred dividend payments of around
The LBO and aircraft purchases are completed as anticipated, increasing the total debt balance to about
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
Clear, credit-conscious capital allocation policy that enhances collateral asset quality and financial flexibility;
A less encumbered capital structure with EBITDAR/ interest + rents sustained below 3.0x and/or first-lien LTV around 60%;
Continued operational execution that improves FCF stability through business cycles, including a healthy contract mix/duration.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
EBITDAR/ interest + rents sustained below 3.5x and/or first-lien LTV sustained above 66%;
Capital deployment actions that reduce collateral asset quality (e.g.., increased average age) and financial flexibility;
Shift in cash flow risk profile that heightens through-the-cycle variability, including weaker contract mix/duration.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Atlas's debt structure will include a
Fitch does not treat the new
Liquidity pro forma at closing is expected to be adequate comprised of
Issuer Profile
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