HONG KONG, January 15, 2020. Pengyuan International has assigned a first-time global-scale long-term issuer credit rating (LTICR) of ‘A-’ to BOC Aviation Ltd (BOC Aviation) with a Stable Outlook.
The rating incorporates a standalone credit profile (SACP) of ‘bbb’, which reflects BOC Aviation’s strong operating profile, robust funding capabilities, resilient earnings outlook, and well-seasoned management. In addition, the rating considers the extraordinary support from the company’s parent, Bank of China Ltd (BOC). We are of the view that BOC has a strong willingness to support BOC Aviation in a distressed scenario, given the latter’s status within the group and potential reputation risks associated with the subsidiary’s failure.
These strengths are partially offset by BOC Aviation’s asset-heavy balance sheet, increasing cost of debt as it adjusts its funding structure, and uncertainties around Boeing 737 MAX deliveries. However, we note that many of these credit characteristics are intrinsic to the aircraft leasing industry and that BOC Aviation’s standalone profile compares favorably with its peers’ globally.
The Stable Outlook reflects our opinion that, despite a potentially more challenging global economic environment, the company’s profitability, capitalization and asset quality are likely to remain commensurate with our expectations for the current rating level in the next 12 months.
We would consider a downgrade if BOC Aviation’s financial profile is materially impaired by a sharp increase in debt leverage and/or if the company’s liquidity deteriorates significantly. We would also consider a downgrade if we believe BOC’s willingness to support BOC Aviation will weaken materially, which may be reflected by a substantial reduction in shareholding and/or a change in the group’s strategic intent.
We would consider an upgrade if BOC Aviation can consistently demonstrate an improvement in leverage, driven by a combination of a more conservation expansion strategy and a reduction in balance-sheet gearing.
Strong Operating Profile. We believe BOC Aviation has a strong operating profile, underpinned by an exceptionally high fleet utilization rate and cash collection rate, which have averaged 99.8% and 99.5%, respectively, from 2008 to 1H19. We expect the long duration and low termination rate of the company’s lease portfolio will continue to produce a steady cashflow stream and bolster its debt repayment capacity going forward. The portfolio’s diversification by geography and client is also a significant credit strength in a procyclical industry, in our view.
Robust Funding Capabilities. We view the company’s funding capabilities favorably. As at end-1H19, BOC Aviation had USD3.5 billion in undrawn committed credit facilities, of which USD2 billion were provided by BOC. We note that the firm has made substantial efforts in strengthening its asset-liability structure since 2015, with 73% of its interest-bearing liabilities and 79% of its lease book quoted in fixed-rate terms as of 1H19. Over 90% of the mismatched interest-rate exposure is hedged. We also believe that the BOC brand could be a positive factor in arranging for external financing.
Resilient Earnings Outlook. With a long track record of strong earnings, we expect BOC Aviation’s profitability profile to remain more resilient than its closest peers’. We anticipate that management will be able to deliver a ROAE of between 15-16% and a ROAA of around 3.5-3.7% in 2020 to 2021. Our assumptions are based on a net lease yield of around 8.5%, which we believe will continue to be supported by a relatively young fleet age of about 3 years, a high-quality airline client base, and the firm’s well-established position in fast-growing geographical segments.
Well-seasoned Management. We believe BOC Aviation is run by an experienced team with long tenures with the firm. In our view, the company’s financial management appears to be conservative, with its aircraft’s appraisal value exceeding their net book value by 10-15% since 2015. In monetary terms, this amounted to USD1.5 billion as of 1H19, which is an adequate buffer even in a moderately negative economic scenario, in our view. The firm’s improving asset-liability profile in terms of pricing structure and durations is also a notable credit strength.
Asset-heavy Balance Sheet. Due to the unique features of the aircraft leasing industry, BOC Aviation has a high net debt to EBITDA ratio, which we expect to average around 7x over 2020-2021. While this level may seem high on an absolute basis and as compared to some other non-bank financial sectors, we note that it may underestimate the firm’s ability to monetize on its assets in the medium to long term. In particular, we believe the firm’s high leverage is partially moderated by the marketability of its fleet, as well as the stability of its future lease cash flows.
Increasing Cost of Debt. It is noteworthy that the firm’s overall cost of debt increased from 2.0% in 2015 to 3.6% in 1H19, against the backdrop of a low interest-rate environment. According to management, this is mainly attributable to a significant shift towards fixed-rate funding, which accounted for 73% of debt in 1H19, compared to only 20% in 2015. While we recognize the benefits that this may provide in terms of asset-liability management in the longer-term, this strategy may continue to be a drag on run-rate earnings, which has been factored into our forecasts for 2020 and 2021.
Uncertainties Around Boeing 737 MAX Deliveries. In 1H19, 18 aircraft scheduled for delivery were delayed, of which six were Boeing aircrafts with primarily 737 MAX. Furthermore, we note that at end-1H19, BOC Aviation had 162 aircraft in the order book, 87 of which belonged to the Boeing 737 MAX family. While we do not expect the continued grounding of the 737 Max aircraft to have a major impact on the company’s credit profile, continued delivery delays could cloud its revenue growth outlook, in our view.
Note: Ratings mentioned in this press release are unsolicited ratings.
Stanley Tsai, CFA
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Date of Relevant Rating Committee: 11 December 2019
Additional information is available on www.pyrating.com
Global NBFI Rating Criteria (16 August 2019)
Unsolicited ratings – non-participative rating – not disclosed
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