Fitch Ratings has affirmed the 'A-' Long-Term Issuer Default Rating (IDR) of BOC Aviation Limited and the 'A-' ratings of its senior unsecured debt and medium-term note programmes.
The Rating Outlook is Stable.
Fitch has also assigned Shareholder Support Rating (SSR) of 'a-' to BOC Aviation, in line with Fitch's updated 'Non-Bank Financial Institutions Rating Criteria' published Jan. 31, 2022.
These actions are being taken in conjunction with a broader aircraft leasing industry peer review conducted today by Fitch, which includes nine publicly rated firms. For more commentary on the broader sector review, please see 'Fitch Rtgs Completes Aircraft Lessor Peer Review; Stable Credit Profiles Despite Looming Macro Risks', available at www.fitchratings.com.
Key Rating Drivers
BOC Aviation's ratings reflects Fitch's expectation of a high probability of extraordinary support from BOC Aviation's ultimate parent, Bank of China Limited (BOC; A/Stable), if required. The affirmation reflects our view that BOC's propensity and ability to support BOC Aviation remain intact as the global aviation industry gradually recovers from COVID-19 pandemic.
BOC's ratings, in turn, reflect an expectation of sovereign support from China (A+/Stable). We expect the support to flow through to BOC Aviation from BOC in times of stress, as BOC Aviation's default could cause material reputational damage to BOC given the shared branding and majority ownership.
BOC Aviation's IDR is one-notch lower than BOC's. This reflects BOC Aviation's strong links with BOC, as evidenced by shared branding, a high degree (70%) of ownership and board representation (six of the eleven seats including the chairperson), cross-selling initiatives and contingency liquidity support. BOC Aviation continues to focus on the group's aircraft leasing business, while BOC's domestic subsidiary, BOC Financial Leasing, focuses on the financial leasing business in China.
Counterbalancing these support considerations is BOC Aviation's relatively low financial contribution to the broader BOC group (0.6% of BOC's consolidated assets at end-2021) and the fact that the aircraft lessor operates in a different jurisdiction. The company's management and operations are considered more independent compared to other Chinese leasing subsidiaries.
BOC Aviation's SSR is aligned with its IDR, indicating the minimum level to which its IDR could fall if Fitch does not change its view on potential support from BOC Aviation's parent. The 'a-' SSR indicates an extremely high probability of receiving extraordinary support, in case of need, to prevent it from defaulting, as BOC Aviation is considered a strategically important subsidiary of BOC.
BOC Aviation's standalone credit profile has remained solid despite higher impairment loss through the pandemic. It maintains a relatively young, in-demand and fuel-efficient fleet with an average fleet age of 4.1 years and average remaining lease term of 8.2 years at end-March 2022, which reduces asset quality risk. Impairment charges increased to 0.8% in 2021 but remained lower compared to the peers.
The company's net exposure to aircraft previously leased to Russian airlines was $589 million at end-March 2022, or 2.5% of total assets. All Russian leases were terminated to comply with sanctions while the aircraft remain in Russia. Fitch expects the company to record impairment on its Russian aircraft portfolio in 2022 but views this as a one-time event with manageable impact as a full write-down is estimated to cause leverage, measured by debt-to-tangible equity, to increase by 0.4x on a pro-forma basis. Fitch believes the eventual receipt of insurance proceeds (timing and amount to be determined) will help to eventually offset the write-down.
BOC Aviation continues to report the highest pre-tax return on average assets among aircraft leasing peers, supported partially by strong funding access and low funding costs due to the strong linkages and the perceived parent support from BOC. Leverage dropped to 3.2x at end-2021 from 3.5x a year ago and remains within its long-term targeted range of 3.0x to 4.0x. This is higher than rated peers, but Fitch considers it appropriate relative to the company's portfolio risk appetite, active portfolio management, and the quality of its fleet.
BOC Aviation's liquidity position is considered solid, with liquidity coverage ratio (available funds over expected obligations over 12 months) at around 2.2x at end-2021. The company had unrestricted cash balances of USD485 million and access to around USD5.6 billion in undrawn committed revolving credit facilities and term loan facility, including a USD3.5 billion facility with maturity at end-2026 provided by BOC.
BOC Aviation's unsecured funding remains high at around 96% of total debt at end-2021. The ratings of the senior unsecured debt and medium-term notes are equalized with the IDR of BOC Aviation, reflecting a sufficient level of unencumbered assets to support average recoveries in a stressed scenario.
Rating constraints applicable to the aircraft leasing industry more broadly include the monoline nature of the business; vulnerability to exogenous shocks; sensitivity to higher oil prices, inflation and unemployment, which negatively impact travel demand; potential exposure to residual value risk; and reliance on wholesale funding sources.
The Stable Outlook reflects Fitch's expectation that BOC Aviation's role as a strategically important subsidiary of BOC and its close operational linkage with the parent will remain unchanged. The Outlook is also consistent with the Stable Outlook on BOC's ratings.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BOC Aviation's ratings are primarily sensitive to changes in BOC's ratings given the one-notch differential between the IDRs of BOC Aviation and BOC. Any change in the BOC's rating, including as a result of a shift in the perceived willingness or ability of China's government to support BOC in a full and timely manner, or change in China's sovereign rating, are likely to affect BOC Aviation's ratings by the same magnitude.
Although not expected by Fitch, BOC Aviation's ratings could be adversely affected should BOC seek to dispose of or meaningfully reduce its investment in BOC Aviation. The ratings could also be downgraded if there are any other developments within BOC that are perceived by Fitch as reducing BOC's willingness or ability to provide support to BOC, including weakening in BOC Aviation's strategic importance and role in the group.
Negative rating action could also be taken if BOC Aviation's operating performance was to deteriorate materially and fail to deliver the return on investment envisaged by BOC, which could affect Fitch's assessment of the propensity of BOC to provide support to BOC Aviation in case of need.
The ratings on the senior unsecured debt and medium-term notes are sensitive to changes in BOC Aviation's IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A rating upgrade could be triggered if there is a similar rating action for BOC, which in turn is sensitive to a strengthening of the willingness and ability of the Chinese government to support BOC. BOC Aviation's ratings could also be upgraded if its role in the group and the level of integration with the parent are strengthened meaningfully, although this is less probable given its monoline airline leasing business model in the international market.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Fitch views BOC Aviation as a strategically important subsidiary of Bank of China Limited and rates BOC Aviation one notch lower than BOC's IDR of 'A'. BOC Aviation's ratings are primarily sensitive to changes in BOC's ratings given the one-notch differential between the IDRs of BOC Aviation and BOC
ESG Considerations
The highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
BOC AVIATION LIMITED 
