Moody's Upgrades ATSG to Ba1 from Ba2; Outlook is Stable

Rating Action: Moody's upgrades Air Transport Services Group, Inc. to Ba1 from Ba2; outlook is stable
22 Jun 2022

New York, June 22, 2022 -- Moody's Investors Service ("Moody's") has upgraded the corporate family rating of Air Transport Services Group, Inc. (ATSG) to Ba1 from Ba2 and upgraded the backed long-term senior unsecured ratings of subsidiary Cargo Aircraft Management, Inc. (CAM) to Ba2 from Ba3. Moody's also revised the outlooks for both entities to stable from positive.

Upgrades:

..Issuer: Air Transport Services Group, Inc.

....LT Corporate Family Rating, upgraded to Ba1 from Ba2

..Issuer: Cargo Aircraft Management, Inc.

....Backed Senior Unsecured Regular Bond/Debenture, upgraded to Ba2 from Ba3

Outlook Actions:

..Issuer: Air Transport Services Group, Inc.

....Outlook, Revised To Stable from Positive

..Issuer: Cargo Aircraft Management, Inc.

....Outlook, Revised To Stable from Positive

RATINGS RATIONALE

Moody's has upgraded ATSG's ratings in consideration of the company's reduced debt-to-EBITDA and debt-to-tangible net worth leverage measures, highlighting the company's strong earnings and cash flow and lower debt levels as it has grown its fleet and base of revenues. ATSG's ratings are also supported by its continued strong position as one of the world's leading providers of air cargo fleet leasing and related services, including crew, maintenance and insurance (CMI) services, its balanced growth, and its effective management of funding and liquidity. ATSG's credit challenges include its high customer concentrations and the company's exposure to the cyclicality of the air transportation industry.

ATSG's air transport services operations have benefited over the past several quarters from rising demand for air cargo services, underscored by the continued growth of ecommerce and freight-forwarding volumes. These trends have increased the opportunity for ATSG to deploy additional aircraft into long-term lease arrangements and CMI services with key customers, particularly Amazon.com Inc. (A1 stable) and as well DHL (owned by Deutsche Post AG, A3 stable). As a result, ATSG's earnings and cash flow have been more resilient than lessors of passenger aircraft due to the operating strength its leasing and CMI services associated with the time-definite scheduled package delivery operations.

Earnings and cash flow strength have helped to push ATSG's leverage lower. The company's Moody's-adjusted debt-to-EBITDA declined to 2.2x (annualized) for the quarter ended 31 March 2022 from 2.8x for the year-ended 31 December 2019 and its debt-to-tangible net worth ratio declined to 1.5x from a negative value, respectively at the same dates. Over this time horizon, ATSG's reported capital position has also benefited from a reclassification of certain warrants granted to Amazon from liabilities to equity as well as Amazon's exercise of certain warrants. Moody's expects that ATSG's leverage ratios will remain well-positioned in 2022, reflecting the company's guidance of an 18% increase in EBITDA for the year, as well as only an expected moderate use of leverage to fund the company's capital expenditure program.

A key credit challenge is ATSG's high customer concentrations. In 2021, the US Department of Defense, Amazon, and DHL accounted for 31%, 30% and 12% of the company's revenues, respectively. This challenge is partially offset by the benefits from the high credit quality of these customers and their long-term need for the services provided by ATSG. Positively, Moody's views Amazon's 19.5% minority interest in ATSG as resulting in an alignment of interests that reduces the risk that Amazon's business relationships with ATSG will diminish. Moody's expects that as ATSG's operating scale gradually increases, its concentration with its top three customers will decline somewhat from current levels.

CAM's Ba2 senior unsecured notes' rating is one notch lower than ATSG's Ba1 corporate family rating, reflecting the notes' relative priority and proportion in ATSG's capital structure (being subordinate to its secured revolving credit facility), and the strength of the notes' asset coverage. The notes are guaranteed on a senior unsecured basis by ATSG and certain restricted subsidiaries of ATSG. The indenture includes certain covenants restricting ATSG's ability to, among other things, incur additional debt, pay dividends, create certain liens, merge and sell assets.

Moody's has revised ATSG's and CAM's outlooks to stable from positive based on expectations that ATSG's capital position will remain strong based on rising EBITDA and moderate use of debt to fund fleet growth over the next 12-18 months. The stable outlooks also reflects Moody's expectation that demand for air cargo services will remain strong even as economic growth tapers under the weight of rising inflationary pressures and supply chain bottlenecks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade ATSG's ratings if the company maintains debt-to-EBITDA of 2.0x or less, maintains profitability measured as the ratio of net income to average assets that compares well with peers, effectively manages its customer concentrations, and if its capital expenditures and fleet growth occur at a moderate pace.

Moody's could downgrade ATSG's ratings if the company's operating results deteriorate, its capital or liquidity profiles weaken as a result of debt-financed acquisitions or capital expenditures, or if the company loses a material customer or suffers a business disruption that weakens its financial prospects.

The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65543. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

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Mark L. Wasden
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
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U.S.A.
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Donald Robertson
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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