BOC Aviation Pte. Ltd. Upgraded To 'A-' And Removed From CreditWatch; Outlook Stable

Over view
• We believe Singapore-based BOC Aviation is likely to benefit from indirect extraordinary support from the Chinese government through Bank of China if the company faces financial difficulties.
• Our view reflects reputational risk for the government if BOC Aviation defaulted, the company’s small size relative to the Bank of China group, and the government’s track record of providing support for overseas subsidiaries of government-related entities.
• We are therefore raising our long-term corporate credit rating on BOC Aviation to ‘A-’ from ‘BBB’ and our ASEAN regional scale rating to ‘axAA’ from ‘axA’. We are also raising our issue ratings on BOC Aviation’s global medium-term notes program, drawdowns under the program, and senior unsecured notes to ‘BBB+’ from ‘BBB-’.
• In addition, we are raising the ASEAN regional scale rating on the notes to ‘axAA-’ from ‘axA-’ and the Greater China regional scale rating to ‘cnAA-’ from ‘cnA-’. We also removed all the ratings from CreditWatch, where they were placed with positive implications on Dec. 18, 2014.
• The stable outlook reflects our expectation that BOC Aviation will maintain its strategic importance for its parent Bank of China, and that its financial risk profile will remain broadly stable through 2017.

Rating Action
On March 19, 2015, Standard & Poor’s Ratings Services raised its long-term
corporate credit rating on Singapore-based BOC Aviation Pte. Ltd. to ‘A-’ from
‘BBB’ and ASEAN regional scale rating to ‘axAA’ from ‘axA’. The outlook is
stable. We are also raising our ratings on BOC Aviation’s global medium-term
notes (MTN) program, drawdowns under the program, and its senior unsecured
notes to ‘BBB+’ from ‘BBB-’. In addition, we raised the ASEAN regional scale
rating on the notes to ‘axAA-’ from ‘axA-’ and the Greater China regional
scale rating on the notes to ‘cnAA-’ from ‘cnA-’We removed all the ratings
from CreditWatch, where they were placed with positive implications on Dec.
18, 2014.

Rationale
We upgraded BOC Aviation because we believe the Chinese government would
extend timely and indirect support to BOC Aviation if the company faces
financial distress. In addition, we believe the company is strategically
important to its parent, Bank of China Ltd. We have therefore revised our
assessment of BOC Aviation’s group status to “strategically important” from
“moderately strategic. At the same time, we expect the company’s ‘bbb-’
stand-alone credit profile to remain stable because of steady operating and
financial performances.

In our view, a default by BOC Aviation would have reputational implications
for Bank of China’s regulated and confidence-sensitive banking operations in
China, and indirectly for the Chinese government, given their name sharing and
BOC Aviation’s strategic importance for its parent. The Chinese government has
a track record of supporting subsidiaries of government-related companies,
including banks. Despite its weak financial risk profile in the early 2000s,
Bank of China provided financial support to BOC Hong Kong by assuming
nonperforming debts before the subsidiary’s IPO in 2002. With government
approval, CITIC Group provided substantial support to Hong Kong-based CITIC
Pacific Ltd. in 2008 through novation of substantial loss-making derivative
contracts that the subsidiary entered into. The government provided support
another time to CITIC Pacific through a corporate reorganization within the
CITIC Group Corp. in 2014.

We believe the government would not prevent Bank of China from supporting BOC
Aviation, if needed, given the limited size of the company compared with its
parent. We estimate that BOC Aviation contributed less than 1% of its parent’s
assets, making potential financial support by Bank of China manageable.

We note that Bank of China’s MTN program contains a cross-default clause
between Bank of China and the subsidiaries in which the bank owns more than a
50% stake. Such subsidiaries include BOC Aviation, of which Bank of China owns
100%. We do not equate the ratings on BOC Aviation to that on Bank of China on
this basis because the terms and conditions of financing documents evolve from
time to time. However, we view this cross-default clause as a sign of the
parent’s commitment to BOC Aviation’s financial soundness.

Our ‘BBB+’ rating on the company’s global MTN program, the drawdowns, and the
company’s senior unsecured notes is one notch below the corporate credit
rating on BOC Aviation. This is because the company’s total secured debt
exceeds our notching threshold. BOC Aviation expects to use the notes proceeds
for capital spending and general corporate purposes.

The stand-alone credit profile of BOC Aviation reflects our view of the
company’s good cash flow stability from long leases, and its sound and
sustainable competitive position. BOC Aviation’s moderately higher leverage
than other rated peers’, our expectation of elevated capital spending over the
next two years, and its exposure to the industry’s cyclical demand and
aircraft lease rates temper these strengths.

Liquidity
We assess BOC Aviation’s liquidity as “adequate” because we expect the
company’s liquidity sources to exceed needs by about 1.2x or more over the
next 12 months. We expect BOC Aviation’s liquidity sources to exceed its needs
even if the company’s EBITDA declines by 15%.

Our liquidity assessment is based on the following factors and assumptions.

Principal liquidity sources include:
• Funds from operations (FFO) that we estimate at US$750 million-US$800
million.
• About US$232 million in unencumbered fixed cash and cash equivalents as
of Dec. 31, 2014.
• An undrawn committed credit line of US$2.25 billion from Bank of China
and various international banks as of Dec. 31, 2014. These provide BOC
Aviation with significant funding flexibility, in our view.
• We also expect asset sales to provide an additional source of liquidity.

Principal liquidity uses include:
• About US$914 million in short-term debt.
• Committed capital spending of about US$1.7 billion.

Outlook
The stable outlook on BOC Aviation reflects our expectation that the company
will remain strategically important to Bank of China and our expectation of
indirect government support through the bank in the event of financial
distress. The stable outlook also reflects our expectation that the company
will maintain its sound market share and competitive position and that its
“significant” financial risk profile will remain broadly stable through 2017.

We anticipate that BOC Aviation will maintain a ratio of FFO to debt of 9%-10%
and a ratio of debt to capital of about 80%.

We could lower the ratings if: (1) we lower our stand-alone credit profile on
the company. We believe this could materialize if BOC Aviation increases its
debt-funded capital spending beyond our expectations. A ratio of debt to debt
plus equity increasing beyond 85% or a ratio of FFO to debt falling below 5%
on a sustainable basis would indicate such deterioration; and (2) we believe
support from Bank of China is likely to wane. This could materialize if BOC
Aviation’s strategic importance reduces following a shift in Bank of China’s
strategy, a material change in ownership or in the name sharing.

We believe an upgrade is unlikely over the next two years. We may raise the
rating on BOC Aviation if we upgrade both Bank of China and BOC Aviation’s
stand-alone credit profile while BOC Aviation maintains its strategic
importance to the bank.

We could raise the stand-alone credit profile on BOC Aviation if we believe
demand and lease rates for aircraft lessors improve materially from current
levels. BOC Aviation’s ratio of FFO to debt increasing above 12% on a
sustainable basis would indicate such improvement.

Related Criteria And Research

Related Criteria
• General Criteria: Standard & Poor’s National And Regional Scale Mapping Tables, Sept. 30, 2014
• General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014
• Group Rating Methodology, Nov. 19, 2013
• 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
• 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Related Research
• BOC Aviation Pte. Ltd. Rating Placed On CreditWatch Positive On Revised Group Status, Dec. 18, 2014
• For Transportation Equipment Lessors, Multiyear Leases Aid Cash Flow and Ratings Stability, Oct. 18, 2006

Ratings List
Upgraded; CreditWatch Action
BOC Aviation Pte. Ltd.
Corporate Credit Rating
ASEAN Regional Scale
Senior Unsecured
Senior Unsecured
Senior Unsecured

To From
A-/Stable/— BBB/Watch Pos/—
axAA/— axA/Watch Pos/—
BBB+ BBB-/Watch Pos
axAA- axA-/Watch Pos
cnAA- cnA-/Watch Pos

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