Fitch Ratings has affirmed AVIC International Leasing Co., Ltd.'s (AVICIL) Long-Term Issuer Default Rating (IDR) at 'A-', Short-Term IDR at 'F1' and Shareholder Support Rating (SSR) at 'a-'.

The Outlook on the Long-Term IDR is Stable. Fitch has also affirmed the ratings on AVICIL's medium-term note (MTN) programme and the MTN programme shared by Soar Wise Limited and Soar Wind Ltd. at 'A-'. The senior unsecured notes issued under these programmes were also affirmed at 'A-'. Both Soar Wind and Soar Wise are AVICIL's wholly owned offshore SPVs registered in the Cayman Islands.

AVICIL is 44% controlled by the Aviation Industry Corporation of China (AVIC), a state-owned military and civilian aviation company. AVICIL is the only leasing company in China with an aircraft manufacturing background. Its leasing portfolio comprises four segments: aircraft leasing, at 35% of the portfolio at end-1H23, equipment leasing (33%), urban infrastructure leasing (18%) and ship leasing (13%). Most of AVICIL's clients are Chinese state-owned enterprises.

Key Rating Drivers

Support-Driven Ratings: AVICIL's ratings are underpinned by strong shareholder support from its ultimate parent, AVIC, whose rating is driven by support from the China sovereign (A+/Stable). We expect sovereign support to flow to AVICIL through AVIC in times of need because of AVICIL's strategic role in the group and the potential reputational damage to the group should AVICIL default. AVICIL acts as a captive financier for AVIC's civilian aircraft business. The Outlook is also aligned with our credit profile assessment of AVIC and the Chinese sovereign rating.

Large Non-Group-Related Business: AVICIL's rating is lower than our internal credit view on AVIC. AVICIL's ratings are constrained by its large commercially oriented leasing activities, which are less relevant to AVIC's core business. This could weigh on the parent's propensity and ability to provide timely support. We estimate the group-related business accounted for only a low-teen percentage of AVICIL's total lease portfolio at end-1H23. AVICIL aims to increase the group's leasing penetration rate and enhance the group's operating efficiency. Still, synergies have remained modest.

High Integration: AVICIL's management and operation are highly integrated with that of AVIC, which exercises strong influence and oversight of AVICIL through AVIC Industry-Finance Holdings Co., Ltd. (A-/Stable). AVICIL shares AVIC's brand name and benefits from the parent's strong franchise for business development and funding access. AVIC has continued providing ordinary capital and funding support to AVICIL in the past few years. AVIC supported 13% of AVICIL's total borrowings through its group settlement centre as of end-1H23.

Moderate Standalone Credit Profile: We assess AVICIL's standalone credit profile as sub-investment grade, lower than its support-driven IDR, due to its moderate franchise in a challenging environment, modest profitability and relatively high leverage with a debt-to-tangible equity ratio of 5.6x at end-1H23 (2021: 5.1x). The company has largely maintained its asset size since 2021 with a stable non-performing loan ratio of 1.3%-1.4%. It has shifted its portfolio mix towards new energy, new infrastructure and manufacturing upgrades to align with regulatory guidance for better risk control.

'Very High' Probability of Support: The SSR is based on our view of a 'Very High' probability that AVICIL will receive extraordinary support from AVIC to prevent it from defaulting in times of stress and indicates the minimum level to which AVICIL's IDR could fall if we do not change our view on potential support.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

AVICIL's IDRs and SSR are linked to our internal view of AVIC's credit profile. Any negative change in our view, which could reflect a shift in the perceived willingness or ability of the Chinese sovereign to support AVIC in a full and timely manner, or a downgrade of China's sovereign rating, would affect AVICIL's ratings to at least the same magnitude.

AVICIL's IDRs would be downgraded upon any sign of a weakening in the linkage between AVICIL and AVIC. This could include significant ownership dilution or a reduction in AVICIL's strategic role in the group. This could arise from an expansion of the non-group-related leasing business or underperformance against the parent's performance targets. A large increase in the size of required support relative to AVIC's balance sheet could also widen the notching.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade could result from AVICIL's strengthened strategic role within the group, including a meaningful increase in its group-related business to support AVIC's civilian aviation business or China's aviation industry.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The ratings of the MTN programme under AVICIL, and the MTN programme shared by Soar Wind and Soar Wise, as well as the senior unsecured notes issued under the programmes, are in line with AVICIL's Long-Term IDR, as they are unconditionally and irrevocably guaranteed by AVICIL and will at all times rank at least equally with all its other present and future unsecured and unsubordinated debt.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The ratings on the MTN programmes and the notes issued under the programmes are directly linked to AVICIL's Long-Term IDR, and will move in tandem with changes to the rating. The note ratings could also be downgraded if there is a significantly adverse change in China's capital-account regulations that prevents AVICIL from providing timely cross-border support to service its offshore debt obligations.

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

AVICIL's ratings are driven by Fitch's internal credit view on AVIC.

ESG Considerations

AVICIL has an ESG Relevance Score of '4' for Financial Transparency due to limited asset-quality transparency in China's leasing sector in general, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visithttps://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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