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Rating Action:

Moody's assigns first-time Baa1/P-2 issuer ratings to AVIC Leasing, and (P)Baa1/(P)P-2 program ratings and Baa1(hyb) note rating to its subsidiary

 The document has been translated in other languages

11 Oct 2019

Hong Kong, October 11, 2019 -- Moody's Investors Service has assigned Baa1/Prime-2 foreign currency and local currency issuer ratings to AVIC International Leasing Co., Ltd. (AVIC Leasing).

This is the first time that Moody's has assigned ratings to AVIC Leasing.

At the same time, Moody's has assigned (P)Baa1/(P)P-2 backed senior unsecured program ratings to Soar Wise Limited's medium term note (MTN) program guaranteed by AVIC Leasing.

Moody's has also assigned a Baa1(hyb) rating to Soar Wise Limited's USD-denominated senior unsecured perpetual notes to be issued under the program.

Soar Wise Limited, incorporated in the Cayman Islands, is an indirect wholly-owned subsidiary of AVIC Leasing.

The outlook on AVIC Leasing and Soar Wise Limited is stable.

RATINGS RATIONALE

AVIC Leasing's issuer ratings

AVIC Leasing's Baa1 long-term issuer rating incorporates the company's (1) standalone assessment of ba3, and (2) a five-notch uplift based on Moody's assumption of a very high level of support from its parent, AVIC Capital Co., Ltd. (A3 stable), in times of stress.

The ba3 standalone assessment takes into account AVIC Leasing's (1) franchise in China's leasing industry, and (2) improved liquidity position and asset quality in the past few years. However, the standalone assessment is constrained by (1) the pressure on its capital driven by rapid business growth, and (2) high asset quality risk associated with its equipment leasing business when compared with its other leasing businesses.

Established in 1993, AVIC Leasing is one of the biggest leasing companies in China. As an indirect subsidiary of Aviation Industry Co Ltd of China (AVIC Group), which is the sole domestic supplier of aviation products for the Air Force of the People's Liberation Army in China, the company has a competitive advantage in leasing aviation products, such as aircraft and aviation equipment.

Supported by growing demand for leasing services and relatively benign asset quality, AVIC Leasing has reported strong profit growth over the past few years. Its net profit increased 24% year on year to RMB1.3 billion in 2018, following 28% growth in 2017.

The company has also improved its liquidity position over the past two years by diversifying its funding sources and increasing its long-term funding to reduce refinancing risk. Total long-term borrowing, including project loans and bonds, accounted for around 75% of total interest-bearing liabilities at the end of June 2019, up from 55% at the end of 2016.

Moreover, AVIC Leasing has used more stringent rules for the classification of non-performing loans (NPLs) and requires its clients to provide high quality collateral or guarantees to reduce credit risk. As a result, its overall NPL ratio dropped below 1.5% at the end of March 2019 from 3.6% at the end of 2016. It has also strengthened its provisions for NPLs, with its NPL coverage ratio increasing to around 150% at the end of June 2019 from 67% at the end of 2016. However, its equipment leasing business is mainly focused on the infrastructure, machinery, energy and steel industries, which are more vulnerable than other industries to economic downturns.

At the same time, AVIC Leasing's rapid business growth in recent years has put pressure on its controls, management and system resources. Moreover, despite multiple capital injections from its shareholders, AVIC Leasing's capital adequacy remains under pressure. Its tangible common equity (TCE) to tangible managed assets (TMA) -- under Moody's calculation -- dropped to 10.14% at the end of 2018 from 11.63% at the end of 2017, mainly due to 48% year-on-year asset growth in 2018.

Moody's assumption of a very high level of affiliate support from AVIC Capital is mainly driven by (1) AVIC Leasing's very close and complex operational linkages with AVIC Capital, and (2) its strategic role and important function within AVIC Capital and towards its ultimate parent, AVIC Group.

AVIC Leasing is 85.17% directly and indirectly owned by AVIC Capital, which in turn is 50% owned by AVIC Group. AVIC Capital has different subsidiaries that provide various financial services, and it also performs the treasury function for AVIC Group. However, AVIC Leasing is the largest subsidiary by total assets, and accounted for around 50% of AVIC Capital's total assets at the end of June 2019.

AVIC Group is 100% owned by the State-owned Asset Supervision Administration Commission of the State Council. AVIC Leasing is the sole leasing company to promote and lease aircraft manufactured by AVIC Group. Around 80% of AVIC Group's aircraft are sold via AVIC Leasing, signifying the company's importance to both AVIC Group and China's civil aviation manufacturing industry.

Furthermore, AVIC Group and AVIC Capital have continued to inject new capital into AVIC Leasing over the past eight years to support business growth, and have also leveraged the Group's finance company and clearing center to manage and provide liquidity to AVIC Leasing.

Soar Wise Limited's MTN program and perpetual note ratings

The (P)Baa1 long-term senior unsecured MTN program rating and Baa1(hyb) senior unsecured note rating of Soar Wise Limited are at the same level as AVIC Leasing's Baa1 issuer rating, because the perpetual notes to be issued under the program are unconditionally and irrevocably guaranteed by AVIC Leasing.

The guarantee will constitute a direct, unsubordinated, unconditional and unsecured obligation of AVIC Leasing. Obligations under the guarantee will at all times rank pari passu with AVIC Leasing's existing and future unsubordinated and unsecured obligations. Moody's has therefore rated the program at (P)Baa1 and the proposed bonds at Baa1(hyb), both at the same level as AVIC Leasing's issuer rating.

Although the perpetual notes give the issuer the optional ability to defer distributions on a cumulative basis, the notes are still rated at the same level as AVIC Leasing's issuer rating, rather than notched down, reflecting the following considerations:

(1) The securities rank pari passu with all other present and future unconditional, unsubordinated and unsecured obligations of Soar Wise Limited and AVIC Leasing;

(2) Any deferral, which is cumulative in nature, would trigger dividend stoppers for the issuer and AVIC Leasing itself. Should any of these entities breach the dividend stopper, the distribution rate will increase by 300bps if the securities are not redeemed. Moody's therefore believes that there is a strong incentive for the issuer to continue making distributions to investors on the notes.

Moody's does not intend to assign ratings to non-credit-linked bonds issued under the program where the amount of promised principal is contractually dependent on the occurrence of a non-credit-linked event or is subject to a non-standard source of variation.

What Could Change the Rating -- Up

Because the issuer ratings already incorporate five notches of support uplift, an upgrade would require more explicit support from AVIC Capital or AVIC Group or an upgrade of AVIC Capital's rating, while the company maintains its standalone credit profile.

AVIC Leasing's standalone assessment could be upgraded if it (1) improves its asset quality by further reducing its NPL ratio, (2) maintains its profitability and liquidity position, and (3) slows down its asset growth and strengthens its TCM/TMA ratio.

The MTN program and proposed perpetual notes are unconditionally and irrevocably guaranteed by AVIC Leasing. Consequently, an upgrade of AVIC Leasing's issuer ratings would result in an upgrade of the MTN program and note ratings.

What Could Change the Rating -- Down

AVIC Leasing's ratings could be downgraded if (1) there are signs of weakening support from the parent and ultimate parent, or if AVIC Capital's rating is downgraded, (2) there is a decline in the business relationship with the AVIC Group, or (3) AVIC Capital significantly reduces its shareholding in the company.

AVIC Leasing's standalone assessment could be downgraded in the event of (1) a significant deterioration in its asset quality and rising credit costs, (2) a material weakening in its liquidity and funding profiles, or (3) a significant weakening of its capital levels.

A downgrade of AVIC Leasing's issuer ratings would also lead to a downgrade of the MTN program and note ratings.

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 Shanghai, AVIC International Leasing Co., Ltd. reported assets of RMB156 billion at the end of June 2019.

REGULATORY DISCLOSURES

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 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.

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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.

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, CFA
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, CFA
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

No Related Data.
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