OREANDA-NEWS. Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and senior unsecured debt ratings of Aviation Capital Group Corp. (ACG) at 'BBB-'. The Rating Outlook has been revised to Positive from Stable.

These actions are being taken in conjunction with a broader industry review conducted today by Fitch, which includes five aircraft leasing companies. For more commentary on the broader sector review, please see 'Fitch Completes Aircraft Lessor Peer Review', available at 'www.fitchratings.com'.

KEY RATING DRIVERS

IDR AND SENIOR DEBT

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, rated 'A') and its parent, Pacific LifeCorp (PLC, rated '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 revision of the Outlook to Positive from Stable reflects improvements in ACG's standalone credit profile, most notably reduced balance sheet leverage (debt-to-tangible equity) appetite, driven by a capital injection of \\$150 million in March 2014 from PLIC and continued retained earnings growth. Balance sheet leverage, on a consolidated debt-to-equity basis, was 3.2x as of March 31, 2015, a material improvement from the historical average of between 4x and 4.5x over the last several years.

High Level of Commitment by Parent to Support ACG

Fitch considers ACG's current standalone credit profile to be reflective of a 'BB+' rating without institutional support. Based on the 'Global Non-Bank Financial Institutions Rating Criteria', Fitch views ACG's business as having limited importance to PLC's overall operations due to the limited financial and operating synergies, as well as lack of common branding. This suggests that future support may be uncertain, particularly in a stress scenario.

That being said, Fitch believes PLC maintains a high level of commitment to ACG, as evidenced by the capital injection in March 2014, as well as the continued ownership of 100% of ACG's equity, which amounted to \\$1.66 billion as of March 31, 2015. Consequently, ACG receives a one-notch uplift from its standalone rating due to PLIC's direct ownership and demonstrated financial support. 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.

Appropriate Leverage Target Given Current Portfolio Composition

Management has represented to Fitch its intention to manage leverage between 3.0x and 3.5x, which is lower than historical levels, and thus viewed favorably by Fitch in the context of ACG's risk appetite, active portfolio management, and current and expected fleet profile. The company's aircraft portfolio remains attractive and broadly used by global airlines, providing consistent and stable cash flow generation that reduces the impact of market volatility through various economic and market cycles.

Approximately 96% of the current portfolio contains current generation Boeing B737 and Airbus A320 aircraft, which Fitch views favorably relative to peers. These aircraft types are considered to be highly liquid due to their tradability, broad airline user base, and relatively low transition costs. In addition, the portfolio is relatively young, with a weighted average age of 5.9 years, as of March 31, 2015. Approximately 76% of the portfolio is younger than 10 years, by net book value (NBV).

Managed Growth Over Time with Modest Order Book

ACG's portfolio growth has been measured over time and the company has a modest order book compared to peers. The order book is composed primarily of new technology narrowbody aircraft, which reduces the potential volatility in future pricing and market risk as ACG undertakes future deliveries. Currently, ACG has firm orders on 106 aircraft with deliveries scheduled through 2021. Given ACG's current fleet strategy of investing in young, primarily narrowbody aircraft with broad customer appeal, Fitch expects ACG's overall portfolio attributes will remain relatively consistent over the medium- to longer-term.

Improved Operating Performance while Margins Remain Modestly Below Peers

Lease revenues grew 5.5% year-over-year in 1Q15, reflecting ACG's continued portfolio growth. Annualized net spread, defined by Fitch as lease yields less funding costs, amounted to 6.3% in first quarter 2015 (1Q15). Lease yields are derived from operating lease revenues as a percentage of average aircraft NBV, whereas funding costs are calculated by interest expense as a percentage of average debt outstanding. While ACG's net spread is modestly below its peers, Fitch notes that the metric has remained stable over time, averaging 6.6% over the last several years.

Operating performance has improved year-over-year in 1Q15, with pre-tax earnings and net income growing 64.5% and 63.8%, respectively, on portfolio growth and lower overall interest expenses, which more than offset an increase in depreciation during the year. Fitch expects operating performance could improve moderately in the near- to medium-term, as a result of the growth in the aviation market and the company's own portfolio.

Sufficient Liquidity and Consistent Operating Cash Flow Generation

Liquidity is sufficient given ACG's consistent operating cash flow generation through various cycles. Fitch views ACG has having sufficient available cash on hand and availability under its various funding facilities to meet upcoming debt maturities and new aircraft funding commitments. On a relative basis, ACG has historically maintained relatively low cash balances in efforts to deploy its capital in revenue-generating aircraft assets.

Favorable Funding Profile with Strong Balance Sheet Flexibility

As part of its overall funding strategy, ACG continues to make significant progress in diversifying its funding profile and broadening its capital markets access across various funding sources. ACG completed a three-year, \\$600 million unsecured note transaction in 3Q13, which materially increased the level of unsecured debt in its overall funding profile. As of March 31, 2015, unsecured debt represented 61.1% of total funding, which is viewed favorably by Fitch.

Due to its predominantly unsecured funding profile, ACG has a significant pool of available unencumbered assets, which provides material support to the unsecured noteholders and is viewed positively by Fitch as it provides additional balance sheet flexibility in times of market stress. ACG is required under its debt agreements to maintain a minimum level of unencumbered assets to unsecured debt of 1.25x. As of March 31, 2015, this ratio amounted to 1.51x. The ratings of the senior unsecured debt are equalized with the IDR of ACG, reflecting sufficient level collateral to support average recoveries in a stressed scenario.

RATING SENSITIVITIES

IDR AND SENIOR DEBT
An upgrade to ACG's ratings 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 will maintain 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 Fitch's assessment of PLIC's willingness or ability to provide timely support to ACG change.

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.

Fitch has affirmed the following ratings:

Aviation Capital Group Corp.:
--Long-term IDR at 'BBB-'
--Senior unsecured debt at 'BBB-'

The Rating Outlook is revised to Positive from Stable.