Fitch Affirms BOC Aviation at 'A-'; Outlook Stable
These actions are being taken in conjunction with a broader aircraft leasing industry peer review conducted today by Fitch, which includes five publicly rated firms. For more commentary on the broader sector review, please see 'Fitch Completes Aircraft Lessor Peer Review', available at 'www. fitchratings. com'.
KEY RATING DRIVERS
IDRs, SENIOR DEBT AND MEDIUM-TERM NOTES
The rating affirmations and Stable Rating Outlook reflect Fitch's continued expectation of a very high probability of extraordinary support from BOC Aviation's ultimate parent, Bank of China Ltd. (BOC; 'A/Outlook Stable'), if required. This view is based on BOC Aviation's strong links with BOC, which is evident in the parent's shared branding, high level of board representation, cross-selling initiatives, and contingent liquidity support. Counterbalancing these factors is BOC Aviation's small size relative to the broader organization and the fact that it operates in a different jurisdiction.
In June 2016, BOC Aviation completed a partial listing of its shares on the Main Board of the Hong Kong Stock Exchange to institutional and retail investors. In total, the company raised approximately $550 million of net proceeds, which is expected be used to support near-term growth of the aircraft portfolio. At the completion of the offering, BOC's ownership of BOC Aviation was reduced to 70% of the pro forma share capital from 100%. While the change in ownership composition is viewed by Fitch as incrementally negative, Fitch views BOC's continued majority ownership, shared branding, and strategic support for the bank's broader efforts in aviation finance remain as continuing to support the one notch rating differential between BOC and BOC Aviation.
BOC Aviation is one of the few subsidiaries within the BOC group that reports directly to BOC management. Senior members of BOC's management team represent four of the nine members of the board of directors, including the President of BOC, who serves as the Chairman of BOC Aviation. Fitch believes the high level of board representation and management integration reflects BOC Aviation's strategic importance to BOC, even though the former accounted for only 0.4% of BOC's consolidated assets as of year-end 2015. BOC Aviation also provides cross-selling opportunities through building new and existing relationships with airlines and aircraft manufacturers.
These factors support Fitch's view that BOC Aviation continues to remain strategically important to BOC, as defined under Fitch's 'Global Non-Bank Financial Institutions Rating Criteria'. Financial issuers deemed to be strategically important subsidiaries are typically rated one - to two-notches below the parent company's long-term IDR. In BOC Aviation's case, the IDR is one-notch lower than BOC's Long-Term IDR of 'A'.
BOC has provided a committed standby liquidity facility totaling $2 billion, which is considerable given BOC Aviation's assets of $12.5 billion at year-end 2015. The maturity of the liquidity facility was extended to 2022 in June 2015. In addition to the committed liquidity facility, BOC also provided an additional $300 million common equity injection to back portfolio growth during 2009 and 2010, which further supports Fitch's view that the parent-subsidiary linkage remains strong.
From a standalone credit perspective, BOC Aviation has exhibited a reasonable track record through cycles, a consistent ability to maintain a relatively young fleet age, solid asset quality performance, sufficient liquidity, appropriate capitalization, and an experienced management team. BOC Aviation has consistently reported the highest pre-tax ROAs among aircraft leasing peers, supported in part by low funding costs due to its strong parent linkages.
The percentage of unsecured funding has grown over the last several years, which represented approximately 50% of total debt as of year-end 2015 compared to only 9% in 2010-2011. This is viewed positively by Fitch, as available unencumbered assets could provide support to unsecured debt holders and balance sheet flexibility in times of market stress. The ratings of the senior unsecured debt and medium-term notes are equalized with the IDR of BOC Aviation, reflecting sufficient level of collateral to support average recoveries in a stressed scenario.
Leverage, defined as total debt to tangible equity, was 3.7x as of year-end 2015, which is relatively consistent with the average of 3.8x since 2008. In the context of the company's portfolio risk appetite, active portfolio management, and current and expected fleet profile, Fitch views BOC Aviation's current leverage metrics as appropriate. In addition to the company's overall portfolio risk appetite, changes in Fitch's view of BOC Aviation's standalone financial profile would likely take into consideration future funding diversity, liquidity profile, leverage appetite, and/or dividend policy.
RATING SENSITIVITIES
IDR, SENIOR DEBT AND MEDIUM-TERM NOTES
BOC Aviation's ratings are primarily sensitive to changes in BOC's ratings, given the one-notch differential between the IDRs of BOC and BOC Aviation.
Further, although not expected by Fitch, BOC Aviation's ratings could be adversely affected should BOC seek to dispose of or meaningfully further reduce its investment in BOC Aviation or there are any other developments within BOC which are perceived by Fitch to alter BOC's willingness or ability to provide support to BOC Aviation. Negative rating action could also be taken if BOC Aviation's operating performance deteriorated, thereby not delivering the return on investment envisaged by BOC, to the extent that this had an impact on Fitch's assessment of the propensity of BOC to provide support to BOC Aviation, in case of need.
The ratings of the senior unsecured debt and medium-term notes are sensitive to changes in BOC Aviation's long-term IDR and the level of unencumbered balance sheet assets in a stress scenario, relative to outstanding unsecured debt. A decline in the level of unencumbered asset coverage combined with a material increase in the use of secured debt could result in the notching between the IDR and the unsecured debt.
BOC Aviation is based in Singapore and owned by BOC. It is a leading global aircraft operating leasing company with a portfolio of 270 owned and managed aircraft, with total assets of $12.5 billion at year-end 2015.
Fitch has affirmed the following ratings:
BOC Aviation Limited
--Long-Term IDR at 'A-';
--Medium-term note program at 'A-';
--Senior unsecured debt at 'A-'.
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