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Rating Action:

Moody's downgrades AVIC International to Ba1; outlook negative

 The document has been translated in other languages

04 Feb 2016

Hong Kong, February 04, 2016 -- Moody's Investors Service has downgraded the senior unsecured rating for the bonds issued by AVIC International Finance & Investment Limited and guaranteed by AVIC International Holding Corporation (AVIC International) to Ba1 from Baa3.

At the same time, Moody's has assigned a Ba1 corporate family rating to AVIC International and withdrawn the company's issuer rating.

The outlook on the ratings is negative.

These rating actions conclude Moody's rating review of AVIC International initiated on 12 November 2015.

RATINGS RATIONALE

"The downgrade reflects our concern on the company's persistently high leverage, as a result of its aggressive land acquisition, low levels of profitability and consistently negative free cash flows from operations," says Joe Morrison, a Moody's Vice President and Senior Credit Officer, and also the International Lead Analyst for AVIC International Holding.

Moody's expects that AVIC International Holding will register a debt/EBITDA around 11x for full year 2015. This level would no longer support a Baa3 rating and would be weak for its lowered standalone credit profile.

AVIC International's Ba1 rating continues to incorporate a four-notch uplift, based on Moody's expectation that the company will receive a high level of support from its parent, Aviation Industrial Corporation of China (unrated), in a stress situation. Its parent is 100% owned by the Chinese government (Aa3 stable) through the State-owned Assets Supervision and Administration Commission of the State Council.

AVIC International's high leverage is largely driven by debt incurred through its property segment's aggressive land acquisitions over the last two years and weak contracted sales. Moody's estimates that around 50% of the company's total debt is used to support land acquisitions. These acquisitions have driven up its inventory levels and pressured its operating cash flows.

While the performances of other key business segments such as international aviation, electronics, consumer and retail were stable in 2015, its resources development and investment businesses remained loss-making.

Moody's notes that AVIC International intends to improve its debt leverage by reducing its presence in the property business through the sale of its subsidiaries or asset disposals. However, Moody's points out that it is unclear as to whether or not the company can execute its deleverage plan as scheduled, given the challenges in the Chinese property market for lower-tier cities.

AVIC International has secured additional long term capital, such as the RMB5.4 billion in equity placements by its subsidiaries, Tianma Micro-electronics Co., Ltd (unrated) and Fiyta Holdings Ltd (unrated), as well as RMB5.1 billion from the issuance of perpetual securities in the six months to 31 December 2015. Moody's considers the perpetual securities as debt like instruments.

"While these capital raisings have partially alleviated AVIC International's near-term funding pressures, the equity issuance by its subsidiaries is insufficient to address our concerns over the company's high debt leverage without material debt reduction through equity raising or assets disposal," says Pingping Xing, a Moody's Assistant Vice President and Analyst, and also the Local Market Analyst for AVIC International Holding.

AVIC International's liquidity profile is weak.

While its internally generated cash flows and cash on hand are insufficient to fund its projected capital spending and short-term debt maturities, Moody's expects that the company can roll-over its short term borrowings and maintain access to funding markets, given its status as a key subsidiary of a state-owned enterprise.

The negative outlook on the ratings reflects the uncertainties as to whether or not AVIC International can execute its deleverage plan over the next 12-18 months. Any improvement in its credit profile will depend on the strength of its commitment to its deleverage plan, and the performance of its key profit contributors, particular its Real Estate & Hotel Management business.

Upward ratings pressure is limited over at least the next 1-2 years, given the negative ratings outlook.

Nevertheless, the outlook could return to stable if the company lowers its debt levels over the next 12-18 months; in particular, if its: (1) adjusted debt/EBITDA falls below 7.0x-8.0x; and (2) adjusted debt/capitalization falls below 70% on a consistent basis.

On the other hand, AVIC International's ratings will be downgraded if:

(1) It fails to implement a deleverage plan;

(2) It continues to adopt an aggressive debt-funded growth approach;

(3) Its underlying business performance deteriorates materially; and

(4) There is evidence of weakening support from its parent, or its parent's credit profile weakens significantly, or if its parent ceases to own a controlling stake in AVIC International.

The credit metrics that Moody's will consider for a downgrade include: adjusted debt/EBITDA, and/or adjusted debt/capitalization in excess of 8.0x and 70%, respectively over the next 12-18 months.

The principal methodology used in rating AVIC International Holding Corporation was Business and Consumer Service Industry published in December 2014. The principal methodology used in rating AVIC International Finance & Investment Limited was Rating Transactions Based on the Credit Substitution Approach: Letter of Creditbacked, Insured and Guaranteed Debts published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

AVIC International Holding Corporation is 62.52% owned by its parent, Aviation Industrial Corporation of China (AVIC).

The subsidiary represents its parent's largest by revenue and profit contribution. It is also AVIC's key platform for the parent company's international aviation businesses.

AVIC International also aggregates most of AVIC Group's non-aviation related businesses, including property, commodity trading, construction, retail, consumer products, high-tech electronics, and resources development. Its revenues in the 12 months ended 30 June 2015 totaled RMB139 billion.

AVIC is wholly owned by China's central government. It aggregates China's aviation industry and is the sole producer of military aircraft and other aviation products for China's army. It also manufactures civil airplanes and owns a diversified portfolio of non-aviation-related businesses. AVIC's 2014 revenues totaled RMB384 billion.

The Local Market analyst for this rating is Pingping Xing, +86 10 6319 6561.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Joe Morrison
VP - Senior Credit Officer
Corporate Finance 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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's downgrades AVIC International to Ba1; outlook negative
No Related Data.
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