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Sept 10 (The following statement was released by the rating agency)
Fitch Ratings has assigned AVIC International Holdings Corporation's (AVIC International, BBB/Stable) USD300m 4.75% senior unsecured notes due 2018 and the USD200m 6% senior unsecured notes due 2023 final ratings of 'BBB'. The notes are issued by AVIC International Finance & Investment Limited, and unconditionally and irrevocably guaranteed by AVIC International.
The notes are rated at the same level as AVIC International's Issuer Default Rating of 'BBB' to reflect that they represent direct, unconditional, unsecured and unsubordinated obligations of the company.
The rating assignment follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 29 August 2013.
Top-down approach: Using a top-down approach in its "Parent and Subsidiary Rating Linkage" criteria, Fitch has notched AVIC International's IDR three levels below the credit profile of its 76.83% parent Aviation Industry Corporation of China (AVIC). This is to reflect its strong linkages with AVIC. The Stable Outlook reflects Fitch's expectation of continuous parent's support for AVIC International.
Fitch's credit assessment of AVIC is notched down one level from China's Long-Term IDR 'A+' (Stable) to reflect very strong linkage between AVIC and State-owned Assets Supervision and Administration Commission (SASAC), which owns 100% of AVIC.
Parent pivotal to defence: AVIC is of very strong strategic importance to China's national defence. Originated from a state-owned aviation manufacturer, AVIC is the backbone of China's military and civilian aviation manufacturing industry. It has a monopoly in military aircraft and short-range missiles manufacturing and maintenance and approximately an 80%-90% share of civilian aviation manufacturing.
Strong linkages with parent: AVIC International is a core unit of and has strong operational and strategic ties with AVIC. It is the only unit operating all of AVIC's key material/parts importing, and is responsible for 80% of AVIC's products/services exporting and 75% of its subcontracting/ outsourcing businesses. As AVIC is a monopoly in the domestic market, AVIC International is in essence the only linkage between China and the global aviation industry. In addition to its significant financial contribution, AVIC International is also indispensable to AVIC's aviation operation chain.
Strong operational ties are evident in AVIC's management control over AVIC International, and AVIC's highly controlled centralised treasury management of subsidiaries funds through AVIC Finance Co., Ltd, a licensed finance company. In addition, AVIC international is positioned by AVIC as its only strategic platform for globalisation and diversifying into non-aviation related sectors (except financial services).
Continuous AVIC direct support: AVIC has consistently provided AVIC International with direct guarantees for its borrowings. Between 1983 and 2000, AVIC provided guarantee to all of AVIC International's bank loans. AVIC also provided an unconditional and irrevocable full guarantee for AVIC International's CNY1.5bn 10-year onshore bond offering in 2010 and CNY1bn 5-year bond offering in 2006. In March 2011, AVIC guaranteed AVIC International's offshore USD200m 15-year loan in acquiring US-based Continental Aviation Engine. Historically, AVIC International not only benefitted from the parent's reputation and referral in bank borrowings, but also enjoyed AVIC's guarantee, when borrowing from Export-Import Bank of China (A+/Stable), a policy bank fully owned by the Chinese government, for an accumulated amount of close to CNY50bn. Fitch expects AVIC to continue to provide guarantee for AVIC International's borrowings when necessary.
Leverage high, strategy unclear: AVIC International had high financial leverage, measured by funds from operations (FFO)-adjusted net leverage, of 6.9x at end-2012. This is mainly attributable to high capex and working capital requirements, especially from the property development and trading/logistic segments. This was to fund its rapid expansion, which saw revenue grow to CNY119bn (IFRS) for 2012 from CNY36bn (IFRS) for 2009.
Fitch views AVIC International's business development strategy with uncertainty at the current expansion stage. As the diversification platform of AVIC group, AVIC International operates in six segments spanning from international aviation to property to resources businesses. Fitch also expects AVIC will closely oversee AVIC International's restructuring of business segments and its refocusing of resources on core operations to maximise long-term profitability. This is to ensure the reshuffle will fit in with AVIC's group strategy, given its strong linkages with AVIC International.
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Negative rating action on the Chinese sovereign
- Weakening linkages between AVIC International and AVIC
- Weakening linkages between AVIC and the Chinese sovereign
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Strengthening linkages between AVIC International and AVIC
- Strengthening linkages between AVIC and the Chinese sovereign