Hong Kong, January 31, 2019 -- Moody's Investors Service has assigned A3/Prime-2 local currency
and foreign currency issuer ratings to AVIC Capital Co.,
Ltd.
This is the first time that Moody's has assigned ratings to AVIC Capital.
The outlook is stable.
RATINGS RATIONALE
AVIC Capital's A3 long-term issuer rating incorporates the company's
1) standalone assessment of ba2, and 2) a five-notch uplift
based on our assumption of a very high level of indirect support from
the Government of China (A1 stable) via its parent, Aviation Industry
Co Ltd of China (AVIC Group) in times of stress.
The ba2 standalone assessment takes into account AVIC Capital's
stable profitability and niche franchise in the local leasing business,
especially for China's aviation products. The company also
benefits from the strong liquidity available from the group's finance
company, AVIC Finance Co., Ltd (AVIC Finance).
However, AVIC Capital's standalone assessment is constrained
by (1) the pressure on capital driven by rapid business growth,
(2) the relatively high asset quality risk in its equipment leasing business
-- when compared with other leasing businesses, and (3) its
high reliance on short-term funding.
AVIC Capital provides various financial services, including treasury,
leasing, trust, securities, as well as proprietary investment
via its subsidiaries. Owing to the company's relationship
with AVIC Group, the company has a competitive advantage in the
leasing business for China's aviation products, which include
aircraft and aviation equipment.
AVIC Capital has relatively stable profitability. For 2015-2017,
annual net profit was around RMB3,000-3,500 million.
While the securities business has been affected by the volatile capital
market in China in recent years, the strong performance of the trust
business has mitigated the negative impact on its profitability.
In H1 2018, the company reported a net profit of RMB2,049
million, up 26% year on year compared to H1 2017.
However, due to its rapid business growth in recent years,
AVIC Capital's capital adequacy has decreased in the past three
years. The company's tangible common equity (TCE) to tangible
managed assets (TMA) under Moody's calculation dropped to 10.3%
at the end of June 2018, from 11.9% at the end of
2017. Since the company plans to further expand its businesses,
capital adequacy will remain under pressure.
AVIC Capital has relatively high asset quality risk in its leasing business,
especially for equipment leasing. While its leasing subsidiary,
AVIC International Leasing Co., Ltd, has maintained
a relatively stable non-performing loan (NPL) ratio of 2%-3%
in the past few years, the ratio is still higher than that for bank-affiliated
leasing companies in China.
The company's equipment leasing business is mainly directed to the
infrastructure, machinery, energy and steel industries which
are more vulnerable than other industries to economic downturns.
Furthermore, its securities firm, AVIC Securities Co.,
Ltd, has increased proprietary investments in the bond market,
resulting in a higher level of investment risk.
Similar to other leasing companies, AVIC International Leasing relies
on short-term borrowings to support its leasing business.
At the end of June 2018, 44% of AVIC Leasing's interest-bearing
liabilities showed tenors below one year. Since the average maturity
of its leasing contracts is more than two years, the company is
exposed to refinancing risk due to this mismatch in the tenors of its
assets and liabilities.
However, Moody's believes that the related liquidity risk
can be partly mitigated by the liquidity held at AVIC Finance.
This company is an exclusive internal treasury center for AVIC Group,
and has strong levels of liquidity and is managed by AVIC Capital.
AVIC Finance mainly depends on the deposits and equity capital of group
companies to fund its operations. Because the company has no external
debt, the liquidity and default risks that it faces are lower than
those of companies with external debt.
At the end of June 2018, AVIC Finance's loans to other group companies
totaled RMB29.7 billion, accounting for around 36%
of its total assets. The rest of the assets on AVIC Finance's balance
sheet primarily comprise deposits with the central bank and other financial
institutions, and other liquid fixed-income investments.
AVIC Capital's very high level of indirect government support is
mainly driven by (1) AVIC Capital's strategic role and important
function within the AVIC Group, and (2) AVIC Group's strategic
importance to the Government of China.
AVIC Capital is 50.03% directly and indirectly owned by
AVIC Group which is 100% state-owned and managed by the
central government. Apart from 3rd party business, AVIC Capital
provides leasing, financial advisory, investment banking,
sponsor underwriting and other financial services for the AVIC Group through
its subsidiaries.
Furthermore, AVIC Finance, the subsidiary of AVIC Capital,
performs all of AVIC Group's treasury and cash management functions to
ensure efficient use of capital, reduce funding costs, allocate
financial resources within the group efficiently, and indirectly
control the investment activities of member companies. A failure
of AVIC Capital would raise significant business, operational and
reputational risks for AVIC Group.
AVIC Group is the sole domestic supplier of aviation products for the
Air Force of the People's Liberation Army in China and is 100%
owned by the State-owned Asset Supervision Administration Commission
of the State Council. AVIC Group also has the role of developing
China's civil aviation manufacturing industry.
Moody's assesses a very high level of indirect support from the
government for AVIC Capital through its parent, if needed,
given also the Chinese government's 100% ownership of the
parent, the parent's systemic importance, and AVIC Capital's
importance to its parent's business and operation.
What Could Change the Rating -- Up
In view of the fact that the issuer ratings already incorporate five notches
of support uplift, an upgrade would require more explicit support
from the AVIC Group or the Chinese government, while the company
maintains its performance.
AVIC Capital's standalone assessment could be upgraded if it (1)
improves its asset quality by reducing the NPL ratio in its leasing business,
(2) reduces the tenor mismatch between its assets and liabilities,
and (3) strengthens its capital relative to its managed assets.
What Could Change the Rating -- Down
AVIC Capital's ratings could be downgraded if Moody's observes
(1) a weakening of support from the parent and the Chinese government,
(2) a decline in the business relationship with the parent company,
or (3) a significant shareholding reduction by the parent.
AVIC Capital's standalone assessment could be lowered in the event of
(1) significantly deteriorating asset quality and rising credit costs,
(2) a material weakening of its liquidity and funding profiles,
and/or (3) weakening capital levels.
The principal methodology used in these ratings was Finance Companies
published in December 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Headquartered in Beijing, AVIC Capital Co., Ltd.
reported assets of RMB230.5 billion at the end of June 2018.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Sean Hung
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Yat Man Sally Yim
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
