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Rating Action:

Moody's places AVIC International's ratings on review for downgrade

 The document has been translated in other languages

12 Nov 2015

Hong Kong, November 12, 2015 -- Moody's Investors Service has placed AVIC International Holding Corporation's Baa3 issuer rating on review for downgrade.

At the same time, Moody's has placed on review for downgrade the Baa3 rating on the senior unsecured bond issued by AVIC International Finance & Investment Ltd and guaranteed by AVIC International.

RATINGS RATIONALE

"The rating review reflects our concern over the company's persistently high leverage and the challenging operating environment for its property segment," says Joe Morrison, a Moody's Vice President and Senior Credit Officer, and also the International Lead Analyst for AVIC International.

AVIC International's contracted sales in its property segment for the first nine months of 2015 were lackluster. Its aggressive land acquisitions and weak property sales have led to a large increase in inventory, thereby putting pressure on its cashflow. While the performances of other key segments such as international aviation, electronics, consumer and retail were stable, the resources development and investment businesses remained loss-making.

Moody's notes that AVIC International has secured additional long-term capital, including the RMB1.73 billion in proceeds from an equity placement by its subsidiary, Tianma Micro-electronics Co., Ltd (unrated), and RMB8 billion from the issuance of perpetual notes in 2014. AVIC International's shareholders also injected equity of RMB11.2 billion to the company.

"However, such fund raising is insufficient to offset the company's weaker-than-expected operating performance," says Pingping Xing, a Moody's Assistant Vice President, and also the Local Market Analyst for AVIC International.

Moody's estimated that the company's adjusted debt/EBITDA ratio exceeded 11x at the end of June 2015, which is inconsistent with its standalone credit profile.

AVIC International's Baa3 rating includes 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 (AVIC) (unrated), in a stress situation.

Moody's points out that it is unclear as to whether AVIC International can improve its financial profile. Improvements will depend on the company's commitment to a more prudent growth approach, and the performance of its key profit contributors, in particular its property business and raising of additional equity.

Moody's review will focus on AVIC International's: (1) business strategy and financial policy in managing its growth plans, against the backdrop of a difficult operating environment; (2) plans to reduce its high debt level; (3) ability to improve its property segment's performance; (4) equity raising plan by AVIC International and its subsidiaries.

Moody's will also review parent AVIC's willingness and capability to support AVIC International, under the context of ongoing reform of state-owned enterprises. The company's continued rising leverage trend without the parent's commitment to provide tangible financial support, including meaningful equity injections or guarantees to prevent further deterioration of AVIC International's credit profile, could indicate a potentially weaker-than-expected parental support level.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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

The company is its parent's largest subsidiary 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's non-aviation related businesses, including property, commodity trading, construction, retail, consumer products, high-tech electronics, and resources development. Its revenues for the twelve months ended 30 June 2015 totaled RMB139 billion.

AVIC is wholly owned by China's central government. It aggregates the sovereign'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.

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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 places AVIC International's ratings on review for downgrade
No Related Data.
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