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Announcement:

Moody's: Avolon Holdings governance and bond covenants mitigate Bohai and HNA Group Ownership concerns

12 Jun 2018

New York, June 12, 2018 -- Moody's Investors Service has published a new report focusing on the credit risk of aircraft lessor Avolon Holdings Limited (Ba2 stable), owing in part to its indirect ownership by Bohai Capital (unrated) and HNA Group (unrated). Bohai and HNA both have weaker credit fundamentals than Avolon.

The report discusses several questions regarding what are the main risks associated with the ownership structure; how effective Avolon's measures are in protecting bond creditors, the credit profiles of the unrated parents as well as the credit profile of Avolon, among others.

Avolon creditors are offered some protection from risks stemming from Bohai and HNA, both of which have complicated group structures comprised of layers of intermediate holding companies and numerous business lines and entities. Bohai is a global leasing company listed on the Shenzhen Stock Exchange in China, which aims to become a financial conglomerate. It has entered into many related-party transactions with HNA Group. HNA is an international enterprise involved in tech, tourism, and investment.

Bohai has considerable influence over Avolon's strategy, which could lead the latter to direct capital to the benefit of its parent without violating Avolon's borrowing terms, a concern given Bohai's strained liquidity position. HNA also has capital constraints, which pushed Avolon's credit spreads significantly wider when HNA lost its ability to access the debt capital market in late 2017. While Avolon's solid liquidity as well as its bolstered credit agreements reversed the spread widening, its cost of funding and access to capital remain sensitive to the credit developments of its parents.

"To better protect creditors from the risk of excessive capital outflows, Avolon amended its bond indenture this February to include a new mandatory redemption covenant," Mark Wasden, a Moody's vice president says. "We believe the covenant better dimensions the extent to which Bohai can extract capital from Avolon, addressing a key governance concern.

Moody's says even if Avolon fully utilizes the dividend-paying capacity under the covenant, the company's leverage will range below 3.0 times (net debt), on par with peers, a strong positive development.

Avolon's Ba2 rating is constrained by as much as one-notch due to exposure to its parents' financial difficulties as well as dividend payments, which would materially weaken its capital position. However, some of these concerns are mitigated by Bohai's listing on the Shenzhen Stock Exchange, since it is subject to rules governing related- party transactions, four of Avolon's nine directors are independent -- this independent approval is necessary for Bohai to enter into a related-party transaction greater than $23 million, as well as other governance, which protects Avolon from cross-guarantees to Bohi debt.

The report "Avolon Holdings Limited: FAQ: governance structure, bond covenants help protect creditors from risks associated with parents Bohai and HNA," is available to Moody's subscribers at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1116136

***********************************************************************

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian L. Harris
Senior Vice President/Manager
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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