CHINA AIRCRAFT LEASING GROUP HOLDINGS LIMITED
Fitch Ratings has affirmed
The Outlook on the Long-Term IDR is Stable. Fitch has also affirmed the long-term rating of the senior unsecured debt and the medium-term note (MTN) programme issued by CALC Bond 3 Limited and
These actions are taken in conjunction with a broader aircraft leasing industry peer review conducted today by Fitch, which includes nine publicly rated firms. For more commentary on the broader sector review, please see 'Fitch Rtgs Completes Aircraft Lessor Peer Review; Stable Credit Profiles Despite Looming Macro Risks', available at www.fitchratings.com.
State-owned
Key Rating Drivers
IDR
CALC's IDR is two notches above its standalone credit profile of 'bb-', reflecting Fitch's expectation of modest support from state-owned CEG and the affiliated entities within the group, including
Under Fitch's Non-Bank Financial Institutions Rating Criteria, a subsidiary deemed to have 'limited importance' is usually rated at least two notches below the parent or notched up from its standalone profile. The application of the bottom-up approach for CALC, instead of a top-down approach, is driven by CEG's limited shareholding control, the lack of common branding and the complexities of the legal commitments to CALC that span CEG and CEL.
The two-notch uplift reflects a higher degree of strategic alignment than most entities Fitch deems to be of limited importance, including the importance of CALC's operations to CEG's 'Four-Three-Three' development strategy, which includes the objective of cultivating a world-leading aircraft lessor, and CEG's strong operational and managerial control over CALC with a record of providing ordinary funding and liquidity support to CALC. CEG's development strategy was approved by
Fitch's assessment of CALC's standalone credit profile reflects a smaller scale, higher leverage and greater lessee and geographical concentration than other higher-rated peers, as well as significant financing and refinancing needs related to a large order book and substantial debt maturities in the next two-to-three years. These risks are mitigated by the company's quality fleet, limited exposure to troubled airlines and adequate liquidity.
CALC's leverage - measured by debt to tangible equity - is high, between 9.0x and 10.0x from 2018 to 2021, relative to 2.0x to 4.0x for most other Fitch-rated lessors. This results in CALC's limited headroom to withstand potential asset-quality deterioration from its small and concentrated portfolio. Nonetheless, the company's liquid narrow-body aircraft portfolio and its limited exposure to troubled or bankrupt airline companies reduce potential impairment risk and support its operating cash flow.
Profitability has improved, as the return on average equity increased to 14.9% in 2021 from 6.8% in 2020, supporting its asset growth of 8% and lowering leverage slightly to 9.2x in 2021. CALC intends to further reduce its leverage as the company expects its profitability to improve from increasing fleet-trading activities.
CALC has maintained a relatively in-demand and fuel-efficient fleet with an average fleet age of 7.8 years and average remaining lease term of 7.0 years at end-2021. Fitch estimates 82% of CALC's portfolio consists of Tier 1 assets, which can reduce asset-quality risk during downturns. CALC's exposure to lessees domiciled in
Its exposure is mainly to the three largest domestic airlines and their affiliates, which we believe benefit from government support. CALC's impairment losses on lease receivables increased to 0.5% of its net aircraft assets in 2021, but remained lower than that of most peers. Exposure to aircraft previously leased to Russian airlines accounted for 2% of total net aircraft value at
CALC has a large order book of 244 aircraft. The company's total aircraft purchase commitments were
CALC's funding and liquidity benefit from its large undrawn committed and uncommitted credit lines, its continued access to secured and unsecured markets, and ordinary support from CEG and its affiliates. The company's unsecured debt was 51% of total debt at end-2021, and its unencumbered assets adequately covered its unsecured debt by 1.5x at end-2021.
The Stable Outlook on the IDR reflects Fitch's expectation that CALC will maintain sufficient liquidity to support the large order book, supported by a stable operating environment in
Senior Unsecured Debt
The rating on the senior unsecured notes issued by CALC Bond 3 Limited and under the MTN programme by
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A material deterioration in asset performance; heightened risk appetite for growth beyond our expectations; leverage in excess of 10x on a sustained basis; reduced unsecured funding below 50%; and/or lower liquidity relative to debt maturities and order book commitments, could result in a downward revision in Fitch's assessment of CALC's standalone credit profile, leading to a downgrade of the IDRs.
A weakening in the linkage between CEG and CALC, such as a dilution in ownership or control; or a reduction in CALC's strategic role to CEG; or reduced liquidity support from CEG and its affiliates, would also lead to a downgrade.
The rating on the notes and the MTN programme is expected to move in tandem with any changes to CALC's IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A decrease in leverage to below 5.0x on a sustained basis without deterioration in its asset quality and profitability, coupled with strengthened funding and liquidity relative to its financing needs, could lead to an improvement in Fitch's assessment of CALC's standalone credit profile, and thus, the IDRs.
Strengthened linkages between CALC and CEG could be positive for the rating, which could arise from more explicit legal ties between CALC and CEG, or a meaningful increase in CEG's shareholding and control through board representation in CALC.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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