Fitch: Domestic Aircraft Lessors Intensifying China Competition

Thu Jun 19, 2014 9:00pm EDT

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(The following statement was released by the rating agency) TAIPEI/NEW YORK/HONG KONG, June 19 (Fitch) Chinese aircraft lessors are playing an increasingly important role in the country's rapidly growing commercial aviation market, and intensifying the competition with foreign lessors, says Fitch Ratings. While foreign lessors remain the largest players in China, local companies are increasingly placing direct orders with manufacturers to grow their fleets and internationalizing their operations to better compete. The China Banking Regulatory Commission (CBRC) allowed the creation of bank-owned aircraft leasing companies in 2007. The five largest banks in China plus policy bank China Development Bank (CDB) have since started leasing commercial aircraft, primarily on an operating lease basis, as a means to diversify their business activities and provide additional services to their existing airline clients. CDB Leasing and ICBC Leasing, the largest Chinese lessors, each now occupy about 8% of China's aircraft operating lease market, and are actively expanding their fleets. Chinese investors have also shown an appetite for larger leasing platforms, as demonstrated by the unsuccessful bid by a Chinese consortium to purchase International Lease Finance Corp. (ILFC) from American International Group (AIG) in 2012. Bank of China is the only lender with an offshore subsidiary (based in Singapore) dedicated to aircraft leasing. BOC Aviation's (A-) strategy is more closely aligned with traditional aircraft lessors, and its fleet is primarily leased outside of the Chinese market, in contrast with the other domestic lessors. There is also an increasing number of smaller, independent aircraft lessors in China, which stokes up further competition. We think scale is important in this business, and expect to see consolidation among these smaller players in the next few years. Chinese airlines' demand for new aircraft may create challenges for local lessors. After the initial lease period, typically between 10-15 years, a lessor may be forced to take back and remarket the aircraft. Those players with well-developed technical and sales teams, as well as a global presence, are better positioned to move aircraft around the world. CDB Leasing, ICBC Leasing, and Bocomm and have already set up subsidiaries in Dublin to accumulate staff and develop a more diversified lessee base. Most of the purchase activity has been executed via sale-and-leaseback (SLB) transactions with Chinese airlines, while several lessors have started to place orders directly with the manufacturers. ICBC Leasing has been particularly active at placing direct orders over the past two years. SLBs tend to be more competitive than direct placements, and therefore result in lower lease rates, albeit with more highly rated lessees and without the risks associated with order books. The large bank-owned Chinese leasing companies are generally in a better position than local airlines to access capital markets and offshore US dollar funding, and therefore provide an attractive procurement channel for new aircraft. Funding is seen as one of the key constraints for Chinese lessors. Most aircraft purchases and leases are structured in US dollars, whereas Chinese banks are funded in renminbi. Some of the larger leasing companies have already issued dollar-denominated debt, and we believe this trend is likely to continue as lessors try to mitigate the currency mismatch. As Chinese lessors continue to expand their fleets and demonstrate an operating track record, we think their funding options will expand and funding costs may potentially come more in line with more established players. Ilya Ivashkov Senior Director Financial Institutions +1 212 908 0769 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 United States Jonathan Lee Senior Director Financial Institutions +886 2 8175 7601 Fitch Ratings Limited Suite 1306, No. 205 Tun Hwa North Road Taipei Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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