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.
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 entities are participating and the rated entities or their agent(s)
generally provide 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, 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
