DBRS Morningstar Downgrades Voyager Aviation’s Long-Term Issuer Rating to B, Neg. Trend Maintained

DBRS, Inc. (DBRS Morningstar) has downgraded the Long-Term Issuer Rating of Voyager Aviation Holdings, LLC (Voyager or the Company) to B from BB (low), while also downgrading the Company’s Long-Term Senior Debt rating to CCC (high) from B (high). Concurrently, DBRS Morningstar also downgraded the Long-Term Issuer Rating of the Company’s wholly owned subsidiary, Voyager Finance Co. (VFC), to B from BB (low) and its Long-Term Senior Debt rating to CCC (high) from B (high). The trend on all ratings is Negative. The Intrinsic Assessment (IA) for the Company is B, while its Support Assessment is SA3. The Support Assessment for VFC is SA1.

KEY RATING CONSIDERATIONS
The downgrade of Voyager’s Long-Term Issuer Rating considers the ongoing challenging operating environment in the global aviation industry brought on by the Coronavirus Disease (COVID-19) and our view that the industry recovery will be gradual. Moreover, the downgrade reflects the rising refinancing risk that Voyager has related to its Senior Notes due in August 2021 (the 2021 Senior Notes), of which $415 million were outstanding at September 30, 2020. We note this refinancing comes at a time when access to capital for the aviation industry remains constrained; especially for those entities with modest scale, such as Voyager. The rating action also considers Voyager’s more concentrated portfolio by customer and aircraft type, as well as limited financial flexibility to generate contingent liquidity. While Voyager has granted modest rent deferrals to its airline customers, all the deferrals were neutral from a revenue and cash flow perspective for full year 2020, which we view positively. Indeed, as of December 2020, all of Voyager’s airline customers were current on their lease payments with the exception of one. Nevertheless, this environment has impacted the Company’s ability to rebuild its earnings generation ability in 2020 and is likely to remain a headwind in 2021.

The widening of the notching between Voyager’s Long-Term Issuer Rating and its Long-Term Senior Debt rating reflects the increasing refinancing risk related to the 2021 Senior Notes. Voyager has no committed back-up liquidity facility and no unencumbered aircraft as of September 30, 2020, limiting its ability to generate liquidity to meet the upcoming maturity. Voyager’s management has indicated that it is pursuing options in all available debt markets to address the maturity and bolster liquidity. While it is possible that the Company’s sponsor, Centerbridge Partners, may provide capital to support the Company’s liquidity, there are no indications of support at this time. As such, we see an increasing risk of a potential distressed debt exchange for holders of the August 2021 notes.

The Negative Trend considers DBRS Morningstar’s expectation that the recovery in global passenger volumes will be gradual and lengthy likely leading to a sustained period of airline bankruptcies and subdued demand for aircraft, which will create meaningful headwinds for aircraft lessors, including Voyager.

RATING DRIVERS
The trend on the ratings would return to Stable and the notching between the Issuer Rating and Long-Term Senior Debt ratings would be narrowed should Voyager successfully refinance its August 2021 Notes without losses to bondholders. Improving earnings generation supported by growth in the portfolio that broadens diversification by customer and aircraft type along with continued sound lessee performance would result in an upgrade of the ratings. Conversely, an inability to successfully refinance the August 2021 Notes would lead to a downgrade of the ratings. Voyager’s ratings would also be downgraded should the challenging operating environment created by the coronavirus pandemic lead to notable and sustained rent deferrals that pressure cash flow generation, or if earnings were to be pressured by impairments on the value of the aircraft, or if revenue generation were to be impacted by a customer default or early lease terminations.

RATING RATIONALE
DBRS Morningstar considers the strategic partnership agreement entered into in 2018 between Voyager and Amedeo as fortifying and enhancing Voyager’s franchise. Established in 2013, Amedeo is a global leader in investing and managing widebody aircraft with approximately $7.0 billion of assets under management. Under the agreement, Amedeo provides management, aircraft support and asset selection for Voyager in return for a management fee. In DBRS Morningstar’s view, Voyager benefits from the broader aircraft transaction sourcing capabilities through the Amedeo platform and potentially better disposition results. Indeed, in October 2020, Voyager announced it had entered into a sale-leaseback transaction with Breeze Airways for five A220-300 aircraft with deliveries beginning in 1Q22. We note that this is the first transaction sourced and arranged for Voyager by Amedeo, and importantly, requires no capital expenditures from Voyager until the delivery of the aircraft.

While the repositioning of the aircraft portfolio initiated in 2018 has been a positive for Voyager’s risk profile, the Company’s earnings have been adversely affected. DBRS Morningstar had originally considered this to be temporary and expected earnings generation to be restored to a positive trajectory as Voyager deployed capital to purchase additional aircraft. However, the severe downtown in the global aviation industry brought on by the coronavirus disease has created a substantial headwind that has delayed the restoration of earnings. For 9M20, the Company’s net loss of $17.7 million, was reduced from a net loss of $71.3 million in 9M19. The smaller loss reflects the absence of impairment charges and loss on sale of aircraft incurred in 9M19 as Voyager completed the repositioning of the portfolio. The results also reflect lower rental revenue due to the smaller aircraft portfolio partially offset by reduced operating expenses.

Voyager’s aircraft portfolio is modest in size and comprised of young widebody aircraft with long attached leases (no lease expirations until 2022) to flag or sovereign-backed carriers, which in the current challenging environment has been a positive for the risk profile. Importantly, Voyager has no orders for new aircraft with any of the original equipment manufacturers. The absence of a new aircraft order book, as well as minimal aircraft placement risk over the near term are also beneficial for Voyager’s risk profile. However, the portfolio remains concentrated by customer, geography and aircraft type relative to many of its industry peers, which exposes Voyager to potential losses should an airline customer default or rent deferrals be requested from a material portion of the customer base. DBRS Morningstar notes that any potential losses on the rent deferrals are partially mitigated by security deposits in the form of cash or letters of credit, as well as maintenance reserves held by Voyager.

Voyager’s capitalization continues to be acceptable. At September 30, 2020, the Company’s tangible common equity (TCE) ratio was 19.9%. The Company’s funding remains reliant on secured forms of wholesale funding. At September 30, 2020, outstanding debt totaled $1.4 billion, of which 72% was comprised of secured financing. Liquidity was limited with $14.1 million of unrestricted cash at 3Q20. Subsequent to quarter end, Voyager announced that it entered into an agreement to convert an operating lease on a freighter aircraft to a finance lease, and had signed a letter of intent for a second transaction with similar conditions. These transactions will generate material liquidity for the Company, which will be used for general corporate purposes.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
DBRS Morningstar notes that this Press Release was amended on January 7, 2021 to incorporate the title of the Lead Analyst.

All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on June 4, 2020, when the ratings were downgraded.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: David Laterza, Senior Vice President - Head of U.S. Non-Bank FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North American FIG
Initial Rating Date: April 9, 2018

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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