Fitch Ratings has affirmed the 'A-' Long-Term Issuer Default Rating (IDR) of BOC Aviation 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.
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 Fitch’s 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). Fitch expects 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 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.
