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TEXT-S&P summary: BOC Aviation Pte. Ltd.
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(The following statement was released by the rating agency)
Jan 21 -
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Summary analysis — BOC Aviation Pte. Ltd. ———————— 21-Jan-2013
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CREDIT RATING: BBB/Stable/– Country: Singapore
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Credit Rating History:
Local currency Foreign currency
26-Jun-2012 BBB/– BBB/–
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Rationale
The rating on BOC Aviation Pte. Ltd. reflects the company’s good cash flow
stability from long lease lives, sound competitive position, and support from
its 100%-owner Bank of China Ltd. (BOC: A/Stable/A-1; cnAA+/cnA-1). A
moderately higher leverage than that of other rated peers and the industry’s
exposure to cyclical demand and aircraft lease rates partly offset these
strengths. We assess BOC Aviation’s business risk profile to be “satisfactory”
and its financial risk profile to be “significant.”
We assess BOC Aviation’s stand-alone credit profile at ‘bbb-’. Our rating
incorporates a one-notch uplift because we consider BOC Aviation to be a
subsidiary with “moderately strategic importance” to BOC.
BOC Aviation’s financial performance and cash flows for the nine months ended
Sept. 30, 2012, were in line with our expectations. Revenues grew as the
company leased new aircraft to customers and EBITDA margins remained 90%-95%.
The company’s EBITDA interest coverage of 5.5x-6.5x over the period was
stronger than the 3x-4x we had anticipated for 2012. This is because the
company’s capital spending for the period and associated borrowing needs were
substantially lower than the US$2.9 billion we had assumed for 2012. BOC
Aviation does not publish quarterly financial statements.
The company’s interest coverage ratios could decline moderately in 2013 as it
raises more debt to finance capital spending. Our capital spending assumptions
accommodate BOC Aviation’s recent order of 50 new aircraft. The financial
difficulties that BOC Aviation’s India-based customer Kingfisher Airlines Ltd.
is experiencing will not materially affect BOC Aviation’s financial
performance in 2013, in our view. Currently, BOC Aviation still has aircraft
placed with Kingfisher, representing about 1% of the company’s net book value.
Liquidity
BOC Aviation’s liquidity is “adequate,” as defined in our criteria. We expect
the company’s liquidity sources to exceed its needs by about 1.2x or more over
the next 12 months.
Our liquidity assessment incorporates the following factors and assumptions:
— Liquidity sources include our expectation of funds from operations
(FFO) of US$475 million-US$525 million for 2013. The company also has about
US$361 million in cash and cash equivalent as of June 30, 2012, although these
should now be significantly higher following a US$500 million senior secured
notes issuance in September 2012.
— BOC Aviation has a committed credit line of US$2 billion from BOC and
committed credit lines of US$225 million from various other international
banks. Such credit lines provide the company with significant funding
flexibility, in our view.
— We don’t consider any prospective aircraft sales in our liquidity
assessment.
— Liquidity needs over the next 12 months include short-term debt and
capital spending.
— We exclude from liquidity needs bank loans that BOC Aviation would
repay with proceeds from aircraft sales over the next 12 months.
— The company’s liquidity sources will exceed its needs even if EBITDA
declines by 15%.
Outlook
The stable outlook reflects our expectation that BOC Aviation’s financial risk
profile will remain broadly stable through 2014 despite a substantial
debt-funded capital spending plan. We anticipate that the company will
maintain a ratio of FFO to debt of 6%-8% and a ratio of debt to capital of
less than 82%.
We believe an upgrade is unlikely until demand and lease rates for aircraft
lessors improve sustainably. BOC Aviation’s ratio of FFO to debt staying above
12% on a sustainable basis would indicate such improvement.
We could lower the ratings if: (1) BOC Aviation increases its debt-funded
capital spending beyond our expectations, such that its ratio of debt to debt
plus equity increases beyond 85%; or (2) we believe support from BOC is likely
to wane. We could also lower the rating if BOC Aviation’s ratio of FFO to debt
falls below 5% on a sustainable basis. This could happen if the company’s base
monthly lease rate declines below 0.65% while its average funding cost is 250
basis points over LIBOR.
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