OREANDA-NEWS. Fitch Ratings has assigned the following ratings to SMBC Aviation Capital Finance DAC:

--Long-Term Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured notes 'BBB+'.

The notes were issued by SMBC Aviation Capital Finance DAC and guaranteed by SMBC Aviation Capital Limited (SMBC AC; Long-Term IDR of 'BBB+'/Outlook Stable), whose majority parent is Sumitomo Mitsui Financial Group, Inc. (SMFG; Long-Term IDR of 'A'/Outlook Stable).

KEY RATING DRIVERS - IDR and Unsecured Debt

SMBC Aviation Capital Finance DAC's IDR is equalized with SMBC AC's IDR and reflects the full and unconditional guarantee of SMBC Aviation Capital Finance DAC's obligations by SMBC AC.

The senior unsecured notes rating is equalized with SMBC AC's long-term IDR, reflecting Fitch's expectation for average recovery prospects given that the majority of SMBC AC's consolidated debt-funding is unsecured. As of March 31, 2016, secured debt represented 4.5% of total debt and 3.2% of total assets. Pro forma for the notes offering, secured debt represents 4.2% of total debt and 3.1% of total assets.

Though presently representing only a small portion of SMFG's total assets, SMBC AC is viewed by Fitch as strategically important to SMFG and its core banking subsidiary Sumitomo Mitsui Banking Corporation (SMBC), given SMBC AC's fit with the broader company's strategic objective to diversify its business mix and invest outside Japan in activities with different risk/return profiles than the group's traditional corporate financing business. Since SMFG's acquisition of SMBC AC in 2012, this strategic importance has been supported by an integrated strategy, consistent branding, parent company representation on SMBC AC's Board of Directors and parent-supported funding to SMBC AC.

Fitch considers SMBC AC to be a strategically important subsidiary of SMFG as defined under our Global Non-Bank Financial Institutions Rating Criteria, which typically results in a rating of one to two notches from the parent company's Long-Term IDR. In SMBC AC's case, the IDR is notched down twice from SMFG's long-term IDR, reflecting that SMBC AC has a limited operating history under SMFG, is small in size relative to the broader organization, operates in a different jurisdiction and is not fully-owned by SMFG.

Over the last 15 years, SMBC AC (and its predecessor organization prior to acquisition by SMFG) has built a well-established aircraft leasing franchise, profitable in every year of operation (excluding the effect of one-off breakage costs in relation to acquisition refinancing in fiscal year 2013) with limited asset impairment charges and stable lease rates. The company has an experienced management team, an institutional structure capable of supporting a large aircraft fleet, and a customer base well-diversified by both operator type and geography, with a number of relatively strong airline credits comprising the top exposures. Exposure to GOL Linhas Aereas Inteligentes S. A. (Fitch IDR of 'C'), which represented 3.0% of net book value as of March 31, 2016, is of moderate concern.

In terms of SMBC AC's standalone credit profile, Fitch considers the quality of the aircraft fleet a significant strength, as it is largely unencumbered and predominantly comprised of young, in-demand and fuel-efficient narrowbody models of the Airbus A320 and Boeing 737 families, with more on order. The company has demonstrated the ability and discipline to execute aircraft sales successfully through various market environments, which Fitch views positively.

These strengths are counterbalanced by SMBC AC's concentrated funding profile and its elevated balance sheet leverage. Third-party funding represented 41.2% of SMBC AC's total debt funding as of March 31, 2016 and is 45.2% pro forma for the unsecured notes offering. Leverage, defined as debt-to-tangible equity, on a consolidated basis was 4.6x at March 31, 2016 and is 5.0x pro forma for the unsecured notes offering. This pro forma level represented the highest leverage among Fitch-rated aircraft lessors. Fitch expects some reduction in SMBC AC's balance sheet leverage over the next three years, although it is likely to remain higher than most peers.

RATING SENSITIVITIES - IDR and Unsecured Debt

SMBC Aviation Capital Finance DAC's IDR and unsecured note rating are equalized with SMBC AC's Long-Term IDR. As such, the ratings are primarily sensitive to changes in SMFG's ratings, given that the ratings of SMBC AC are notched two notches below those of SMFG. In addition, the expected rating of the unsecured notes is sensitive to changes in Fitch's assessment of the recovery prospects for the notes such that an increase in the amount of secured funding which materially impacts unencumbered asset coverage of unsecured debt could result in the unsecured note rating being notched down from SMBC AC's IDR.

Although not expected by Fitch, SMBC AC's IDR could be adversely affected should SMFG seek to dispose of its investment in SMBC AC or should there be any other developments within SMFG that are perceived by Fitch to alter SMFG's willingness or ability to provide support to SMBC AC. Negative rating action could also be taken if SMBC AC's own operating performance deteriorated, thereby not delivering the return on investment envisaged by SMFG, to the extent that this affected Fitch's assessment of the propensity of SMFG to provide support to SMBC AC in case of need.

Absent upward movement of SMFG's IDR, positive rating action for SMBC AC would most likely be limited to an increase in Fitch's assessment of SMFG's propensity to support SMBC AC, in which case the notching between SMFG's rating and SMBC AC's rating could narrow. For example, consistent profitable growth within SMBC AC, such as to render it a more significant contributor to SMFG's overall business, could be beneficial to the ratings in the long term, especially if accompanied by a degree of earnings retention which served to reduce leverage.

Fitch currently rates SMBC Aviation Capital Limited and SMBC Aviation Capital Finance DAC as follows:

SMBC Aviation Capital Limited

--Long-term IDR 'BBB+'.

SMBC Aviation Capital Finance DAC

--Long-term Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.

SMBC AC is a leading global aircraft lessor, established in 2001 and rebranded as SMBC AC in 2012 on its acquisition by a consortium of SMFG and Sumitomo Corporation companies. As of May 2016, the company owned and managed 439 aircraft valued at over $15 billion, on lease to airline customers in over 40 countries, with commitments to purchase a further 205 aircraft worth over $23 billion from Airbus and Boeing in the coming years.