Will the tender offer trigger any covenants or impact credit ratings, and how might that influence the company's cost of capital?

Covenant & rating considerations

Because the deal is a cash‑for‑notes tender, Avolon will be repurchasing a sizeable portion of its outstanding senior unsecured debt. The redemption could breach any early‑redemption‑penalty or cash‑flow‑coverage* covenants embedded in the original note terms (e.g., a “make‑whenever‑possible” clause that limits repurchases above a certain % of outstanding principal without a rating‑agency waiver). In practice, most large‑aircraft‑financing issuances already contain a rating‑maintenance clause that obliges the issuer to keep its credit rating at or above a designated level (often “A‑” or “BBB‑”) for the life of the notes. If the tender pushes total leverage down—by shrinking both the principal balance and the associated interest‑expense—Avolon is unlikely to fall short of that floor; instead, the reduced leverage should ease the covenant ratios (e.g., Debt/EBITDA, Fixed‑Charge Coverage). Consequently, the probability of a covenant‑breach event is low, assuming the company does not exceed the permitted redemption cap.

Impact on cost of capital

A successful tender that trims outstanding debt improves the company’s leverage profile and can trigger a up‑grade or rating‑stabilisation from agencies (S&P, Moody’s, Fitch). A higher rating compresses the yield spread on any future issuance, directly lowering Avolon’s weighted‑average cost of capital (WACC). Even if the rating remains unchanged, the market will re‑price the existing notes downward (i.e., at a tighter spread) because the cash‑flow burden is reduced and the liquidity risk of the notes falls. In the short‑term, we can expect a positive price reaction in the secondary market for the affected series and a slight tightening of the credit‑default‑swap (CDS) curve. Traders should therefore look for:

1. Spread compression on Avolon’s outstanding notes (or similar high‑yield aircraft‑financing securities) and a modest rally in the equity if the tender signals a stronger balance sheet.
   
2. Reduced funding cost for any next‑round issuance—if Avolon raises new senior notes later this year, the coupon will likely be 10‑15 bp lower than the current issuance level, assuming the rating holds.

Actionable take‑away

Monitor rating‑agency filings over the next 7‑10 business days for any covenant‑waiver requests or rating adjustments. If a rating‑upgrade materialises, position for a long stance on Avolon’s equity or a short‑duration position in its existing notes to capture spread tightening. Conversely, if agencies flag a potential breach of redemption caps, stay on the sidelines until the waiver is secured, as a breach could prompt a rating downgrade and a widening of spreads.