Avolon inches closer to I-grade with driveby to pay down secured debt

Avolon’s unsecured bond driveby today ticks another box in the BB+/Ba2 rated aircraft lessor’s path to becoming an investment grade credit, said four buyside sources.

The company plans to use proceeds from the upsized JPMorgan-led five-year USD 1bn bullet to refinance secured debt – which includes a USD 4.75bn Libor+ 200bps TLB due 2025 – and fund general corporate purposes.

Swapping out secured debt for more unsecured will position Avolon with a lower ratio of secured debt to tangible assets as it moves toward attaining IG requirements set by ratings agencies. Moody’s caps the ratio at 30% for IG credits, two of the sources said.

“The bond doesn’t get them there, but it makes an impact and the threshold is within their reach,” one of the sources said.

As of 31 March, the company’s ratio stood at 49% on a gross basis and 45% on an adjusted basis, according to two sources. At best, if the company uses all proceeds to lower its outstanding secured debt, the gross ratio will be a little higher than 40%, one of sources estimated. Normalized for a period of excess cash holding, on debt-to-equity basis, leverage is expected to stay around 2.8x, one of the sources added.

Avolon priced the notes offering this afternoon at 5.125% and par, in line with whispers from earlier today, a trader and a buysider said.

On the break, the notes traded up to 100.25 for a yield of 5.07%, according to the buysider.

In early August, Bohai Capital, the company’s direct parent, agreed to sell a 30% stake to ORIX Corp for USD 2.2bn. That prompted Moody’s to put Avolon’s rating on review for upgrade, citing “the significant investment commitment by ORIX…as well as an expected reduction in Avolon’s governance risks.” The transaction is expected to close in 4Q18, pending Bohai shareholder approval.

Although Bohai didn’t sell a controlling stake, investors received some assurance that Bohai will need approval from ORIX’s directors for both board-reserved and shareholder-reserved matters going forward, sources said.

“The concern was always that if the parent comes under stress, then they could do bondholder-unfriendly things. Bohai has to now run things by ORIX. It draws a line as to what Bohai can do,” one of the buysiders said.

Avolon’s board of directors is expected to consist of two seats for ORIX, three seats for Bohai, an independent director appointed by Bohai and ORIX and CEO Domhnal Slattery, sources said. All board-reserved matters will require a simple majority from the board, while all shareholder-reserved matters, including any affiliate transactions and major expenditures, will require six out of seven votes, the sources added.

“With the proposed investment by ORIX and the related revisions to its governance structure, both of which we view favorably, we would now assess Avolon as de-linked from Bohai as well,” S&P said in today’s credit rating report.

Avolon tightened covenants in February to ease investor concerns while the company’s ultimate Chinese parent, HNAwent through a liquidity crunch, as reported by Debtwire. Namely, the lessor added a mandatory redemption covenant, a general basket for shareholder payments and a builder basket for consolidated net income and incremental capital distribution.

Avolon’s existing USD 5.25% senior unsecured notes due 2022 traded today at 101.5 to yield 4.825%, down from 102.25 on 4 September, but up from prints at par at the end of July before the ORIX announcement, according to MarketAxess.

Its USD 4.75bn L+200bps (75bps floor) TLB due 2025 is quoted today in the 99.86/100.22 context, in line with levels this month, higher than quotes in the 99.228/99.58 context before the ORIX announcement.

Avolon and JPM declined to comment.

2018 Debtwire

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