OREANDA-NEWS. Aviation Capital Group Corp.'s (ACG; 'BBB-', Outlook Positive) announcement today that it is considering a possible partial public listing, is neutral to its ratings but reinforces Fitch Ratings' view of ACG benefiting from a limited amount of potential support from its parent company, Pacific LifeCorp (PLC; 'A-', Outlook Stable). Fitch currently affords ACG one notch of rating uplift from its standalone credit risk profile based on its relationship with PLC. Other aircraft lessors with shared branding and longer-term strategic alignment with their majority-owner parent companies benefit from more rating uplift and are more highly rated, inclusive of parental support considerations.

PLC announced that it is considering a partial public listing of ACG primarily intended to give ACG access to additional capital to execute its growth strategy. The net proceeds from the issuance are expected to be used for general corporate purposes. While the magnitude of the offering remains unknown, PLC has publicly stated that it intends to retain a majority equity stake in ACG after the IPO and that ACG will remain an important component within PLC's diversified portfolio of businesses.

Fitch views majority equity ownership and control of ACG by PLC, combined with a public commitment to the aircraft leasing business, as key underpinning factors for the continued one notch of rating uplift to ACG. Ratings could be adversely affected under a scenario where PLC no longer retains a majority and controlling interest in ACG, whereby Fitch would remove the one notch of support uplift and ACG would be rated on the basis of its standalone credit risk profile, which is currently viewed to be 'BB+'.

Potential rating outcomes will also consider Fitch's view that ACG's standalone credit risk profile has the possibility to improve over the next 12-24 months, as indicated by the Positive Rating Outlook, reflecting ACG's reduced balance sheet leverage appetite.

Regardless of the specifics of the offering, Fitch will also consider the potential impacts of public ownership on ACG's operating strategy, risk appetite and financial parameters such as leverage and dividends. The pace of potential growth will also be considered relative to the currently competitive environment.

Fitch views the concurrently-announced retirement of ACG's CEO, Denis Kalscheur, at the end of 2016 as neutral to the rating, reflecting adequate management depth. He will be succeeded by Khanh T. Tran as the next CEO effective Jan. 1, 2016.

Fitch understands the motivations for pursuing a public offering, namely the supportive market environment and improving aircraft lessor valuations, underpinned by firm lease yields, improved aircraft values, stable airline industry performance and historically low interest rates. Similar dynamics contributed, at least in part, to BOC Aviation Pte Ltd.'s recently announced partial offering and CIT Group Inc.'s recently announced exploration of strategic alternatives for its CIT Aerospace business.

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 operational synergies, as well as lack of common branding. This suggests that future support may be uncertain, particularly in a stress scenario.

Financial issuers deemed to be of limited importance may be notched up from a rating level commensurate with the company's standalone credit risk profile. In the case of ACG, the Issuer Default Rating (IDR) is notched one level above its standalone credit risk profile of 'BB+' given PLIC's support track record.

ACG's standalone credit risk profile is supported by its solid franchise and competitive position as a global lessor and manager of commercial aircraft, consistent cash flow generation, sufficient liquidity and strong funding profile. The standalone credit risk profile is constrained by ACG's modestly weaker net spreads relative to peers given its focus on long-duration funding, as well as it monoline business model and wholesale funding profile.

An upgrade to ACG's standalone credit risk profile 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 over time, 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.

Significant deterioration in ACG's operating performance or net margins, or a material decline in operating cash flow generation could result in negative rating actions. A material shift in current strategy, a sustained increase in leverage above management's articulated balance sheet leverage target of 3.5x and/or a reduced commitment by ACG to manage leverage below 3.5x could result in the revision of the Outlook to Stable or ratings downgrades.