Financial Institutions Singapore

BOC Aviation Limited Credit Report

Ratings Overview

LTICR ...... A- We have assigned a first-time global-scale long-term issuer credit rating (LTICR) of ‘A-’ to BOC Aviation Limited (BOC Aviation) with a Stable Outlook. Outlook ...... Stable The rating incorporates a standalone credit profile (SACP) of ‘bbb’, which reflects BOC Aviation’s strong operating profile, robust funding capabilities, resilient earnings outlook, and seasoned management. In addition, the rating considers the extraordinary support from the company’s parent, Bank of China Ltd (BOC). We are of the view that BOC has a strong willingness to support BOC Aviation in a distressed scenario, given the latter’s status within the group and potential reputation risks associated with any failure of this subsidiary. Contents These strengths are partially offset by BOC Aviation’s asset-heavy balance sheet, increasing cost of debt as it adjusts its funding structure, and uncertainties around Overview ...... 1 Boeing 737 MAX deliveries. However, we note that many of these credit characteristics are intrinsic to the aircraft leasing industry and BOC Aviation’s Financial Summary...... 1 standalone profile compares favorably with its peers’ globally. Key Rating Factors ...... 2 The Stable Outlook reflects our opinion that, despite a potentially more challenging NBFI Industry Credit Index (NICI) .... 3 global economic environment, the company’s profitability, capitalization and asset quality are likely to remain commensurate with our expectations for the current rating Business Profile Assessment ...... 5 level in the next 12 months. Capital Formation ...... 6 We would consider a downgrade if BOC Aviation’s financial profile is materially Capital Adequacy ...... 7 impaired by a sharp increase in debt leverage and/or if the company’s liquidity deteriorates significantly. We would also consider a downgrade if we believe BOC’s Peer Comparison ...... 8 willingness to support BOC Aviation will weaken materially, which may be reflected Scorecard Summary...... 9 by a substantial reduction in shareholding and/or a change in the group’s strategic intent. Financial Statements ...... 10 We would consider an upgrade if BOC Aviation can consistently demonstrate an Related Criteria ...... 10 improvement in leverage, driven by a combination of a more conservative expansion strategy and a reduction in balance-sheet gearing.

Contacts Financial Summary

Primary Analyst USD million 2017A 2018A 2019E 2020E 2021E Revenue 1,401 1,726 1,973 2,222 2,534 EBITDA 1,282 1,581 1,808 2,044 2,337 Name Stanley Tsai, CFA Net Profit 587 620 677 746 879 Assets 16,040 18,256 20,089 22,715 24,551 Title Managing Director Debt 10,682 12,279 13,315 15,130 16,047 Direct (852) 3615 8340 Equity 3,819 4,199 4,670 5,160 5,737 % E-mail [email protected] ROAE 16.3 15.5 15.3 15.2 16.1 ROAA 4.0 3.6 3.5 3.5 3.7 Net Lease Yield 8.5 8.6 8.6 8.6 8.6 Secondary Analyst Net Lease Yield After Depreciation 4.7 4.6 4.8 4.6 4.6 Liquidity Coverage 21.1 16.4 26.8 24.1 23.9 Name Cyrus Chan Capital Adequacy Ratio* 22.8 22.3 22.4 21.9 22.6 x Title Analyst Net Debt / EBITDA 8.1 7.6 7.1 7.2 6.7 Interest Coverage Ratio 4.9 4.5 4.0 4.0 4.2 Direct (852) 3615 8319 E-mail [email protected] * Economic Capital / Tangible Assets; Source: Company financials, Pengyuan International estimates

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Key Rating Factors

Credit Strengths

. Strong Operating Profile. We believe BOC Aviation has a strong operating profile, underpinned by an exceptionally high fleet utilization rate and cash collection rate, which averaged 99.8% and 99.5% respectively from 2008 to 1H19. We expect the long duration and low termination rate of the company’s lease portfolio will continue to produce a steady cashflow and bolster its debt repayment capacity going forward. The portfolio’s diversification by geography and client is also a significant credit strength in a procyclical industry.

. Robust Funding Capabilities. We view the company’s funding capabilities favorably. As at 1H19, BOC Aviation had USDD3.5 billion in undrawn committed credit facilities, of which USDD2 billion were provided by BOC. We note the firm has made substantial efforts in strengthening its asset-liability structure since 2015, with 73% of its interest-bearing liabilities and 79% of its lease book quoted in fixed-rate terms as of 1H19. Over 90% of the mismatched interest-rate exposure is hedged. We also believe the BOC brand could be a positive factor for BOC Aviation in obtaining external financing.

. Resilient Earnings Outlook. With a long track record of strong earnings, we expect BOC Aviation’s profitability profile to remain more resilient than its closest peers’. We anticipate management will be able to deliver a return on average equity (ROAE) of between 15 and 16% and a return on average assets (ROAA) of 3.5 to 3.7% from 2020 to 2021. Our assumptions are based on a net lease yield of around 8.5%, which we believe will continue to be supported by a relatively young fleet age of about 3 years, a high-quality airline client base, and the firm’s well-established position in fast-growing geographical segments.

. Seasoned Management. We believe BOC Aviation is run by a team with long experience with the firm. The company’s financial management appears conservative, with its aircraft’s appraisal value exceeding their net book value by 10 to 15% since 2015. In monetary terms, this amounted to USDD1.5 billion as of 1H19, which is an adequate buffer even in a moderately negative economic scenario, in our view. The firm’s improving asset-liability profile in terms of pricing structure and duration is also a notable credit strength.

Credit Weaknesses

. Asset-heavy Balance Sheet. Due to the nature of the aircraft leasing industry, BOC Aviation has a high net debt to EBITDA ratio, which we expect to average around 7x over the period of 2020-2021. While this level may seem high on an absolute basis and as compared to some other non-bank financial sectors, we note that it may underestimate the firm’s ability to monetize its assets in the medium to long term. In particular, we believe the firm’s high leverage is partially mitigated by the marketability of its fleet, as well as the stability of its future lease cashflow.

. Increasing Cost of Debt. It is noteworthy that the firm’s overall cost of debt increased from 2.0% in 2015 to 3.6% in 1H19, against the backdrop of a low interest rate environment. According to management, this is mainly due to a significant shift towards fixed-rate funding, which accounted for 73% of debt in 1H19, compared to only 20% in 2015. While we recognize the benefits that this may provide in terms of asset-liability management in the longer term, this strategy may continue to be a drag on run-rate earnings, which has been factored into our forecasts for 2020 and 2021.

. Uncertainties Around Boeing 737 MAX Deliveries. In 1H19, 18 aircraft scheduled for delivery were delayed, of which six were Boeing 737. Furthermore, we note that at end-1H19, BOC Aviation had 162 aircraft in the order book, 87 of which belonged to the Boeing 737 MAX family. While we do not expect the continued grounding of the 737 Max aircraft to have a major impact on the company’s credit profile, continued delivery delays could cloud its revenue growth outlook.

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NBFI Industry Credit Index (NICI)

The Non-Bank Financial Institution Industry Credit Index (NICI) score applicable to BOC Aviation is ‘bb+’, based on the scores of the aircraft leasing industries in the following regions: China ‘bbb-‘; Southeast Asia ‘bb-’; Europe ‘bbb-’; North America ‘bbb-’; and the Middle East ‘bb’. These regional scores are weighted by BOC Aviation’s lease portfolio distribution in terms of net book value to derive the company’s overall NICI score. Since the NICI is designed to capture structural credit quality rather than cyclical performance, it would be unlikely for the above regional NICI scores to change in 2020-2021.

Business Environment

As of 1H19, BOC Aviation’s portfolio by net book value is distributed with 30.8% for Greater China, 22.2% Asia-Pacific ex- Greater China, 27.0% Europe, 11.8% Middle East and Africa, and 8.2% Americas. To arrive at a composite score on the business environment in which the company operates, we have considered the business risk profiles of the regions in Exhibit 1 below.

Exhibit 1: Business Environment

Segment Region Score Risk Profile

With a GDP per capita exceeding USDD10,000 in 2019, we classify China in Stage 3 of economic development. The country’s long-term economic performance compares favorably with its peers’. Although there are significant headwinds in the near term, we believe China’s growth prospects continue to foster a favorable business environment, relative to its Stage 3 peers. In our view, the key risks lie in the property market and the ongoing uncertainties around the US-China trade dispute. China We have a favorable view of China’s ability to maintain a relatively stable business climate, based on our assessment of the government’s effectiveness in pushing through social and economic reforms. Long-term inflation trends also suggest policymakers have the flexibility to pursue an effective monetary policy. However, these strengths are moderated by the market’s high private-sector leverage and developing capital markets.

We expect the region’s GDP per capita in 2019 to exceed USD4,700, putting it in Stage 2 of economic development. Overall, we expect Southeast Asia to deliver strong economic growth in 2020 and 2021, with an average real GDP growth rate of slightly above 5%.

In the emerging markets within the region, we believe the general legal framework has room Business Southeast for improvement, leading to some concerns over the timing and amount of potential recoveries

Environment Asia in bankruptcy cases. The political and social environment in these less advanced economies may lead to uncertainties over the business climate facing aircraft leasing companies. By contrast, the general institutional framework in BOC Aviation’s home market of Singapore is significantly more favorable, in our view. We also believe the Singaporean government has much more flexibility in pursuing effective monetary policies, compared to emerging Southeast Asia.

We expect Europe’s 2019 GDP per capita to exceed USD29,000, which would correspond to Stage 5 of economic development according to our criteria. Meanwhile, we expect real GDP growth to average around 1.7% in 2020 and 2021.

Europe Overall, we consider the general and monetary institutions in most of Europe to be well- established. In particular, we view the legal framework in developed Europe favorably. In the majority of default cases, we believe creditors are able to form reasonable expectations of the timing and amount of potential recoveries.

From a structural perspective, we believe most European countries benefit from well-developed capital markets, which play an important role in fostering long-term sustainable growth.

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We expect the region’s 2019 GDP per capital to exceed USD12,000, putting it in Stage 4 of economic environment. Meanwhile, we anticipate an average real GDP growth rate of 2.5% in 2020 and 2021.

In our view, the legal framework in most countries in the Middle East is under-developed, Middle leading to significant concerns over creditor protection. There may be material uncertainties in

East the timing and amount of recoveries in bankruptcy cases. Continued geopolitical conflicts in much of the region adds to the difficulties of conducting business.

With high inflation, inflation volatility, and heavy reliance on oil exports, most countries in the region lack the monetary flexibility necessary to maintain a stable business climate, in our view. Capital markets are under-developed compared to more advanced economies.

With a GDP per capital of above USD49,000 in 2019, North America is classified as Stage 5 of economic environment based on our criteria. We expect real GDP growth to average around 1.8% in 2020 and 2021.

We believe the US and Canada are among the most sophisticated economies in terms of creditor protection. With a well-established legal framework, the region offers creditors North reasonable expectations of recovery amounts and timing in bankruptcy scenarios. Structurally,

America the business climate in the region is expected to remain favorable, compared to less advanced economies.

The US and Canada have a high degree of monetary flexibility, which has provided the authorities with an effective tool to moderate the impact of cyclical downturns. Capital markets in this region are among the most sophisticated globally, in terms of the breadth and depth of the available instruments.

Source: IMF, World Economic Forum, Pengyuan Internationals

NBFI Industry Risks

Exhibit 2: NBFI Industry Risk

Factor Sub-subfactor Risk Assessment Risk Profile

We assess the global aircraft leasing sector’s industry structure as average. We estimate that the industry has a Herfindahl-Hirschman Index (HHI) score of 319, which reflects a relatively fragmented industry structure. Overall, pricing appears to be largely rational, with most market players reporting a Industry Structure Average net lease yield of between 7.3% and 8.7% from 2017 to 1H19. However, product differentiation is limited, with Boeing and Airbus aircraft comprising the vast majority of offerings.

We assess the industry’s supply and demand dynamics as strong to average. In our opinion, the industry is a beneficiary of the airline operators’ Competitive shift towards an asset-light strategy. Long-term socioeconomic trends are Supply and Demand Strong / Average Dynamics favorable, with the number of global air passengers projected to increase significantly over time. We also note the industry has emerged from previous crises – such as the September 11 attacks in 2001 and the 2008 global financial meltdown – relatively unscathed.

We believe the industry is much less exposed to policy intervention risks compared to other NBFI sectors, such as securities and asset management. Policy Role Strong Aircraft leasing firms operate on a fully commercial basis, with pricing and contract terms negotiated on a competitive basis.

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Overall, we view the industry’s funding conditions as average to weak, reflecting our concerns over potential asset-liability duration mismatches and the resulting exposure to interest-rate movements. However, we note there is a high degree of differentiation between different players’ funding Funding Conditions Average / Weak capabilities, depending on their credit profiles. Common funding channels include bank loans and bond issuances, with varying structures in terms of tenor and floating versus fixed-rate coupons. We also note that long-term lease contracts could be attractive assets to securitize, thanks to their relatively stable cashflow.

We believe the regulatory environment of the aircraft leasing industry is relaxed compared to other NBFI sectors. However, local aviation authorities Regulatory Framework Weak / Very Weak may provide some safeguards over airline operators in financial difficulties. Preemptive measures to suspend the licenses of failing operators could, for instance, improve recovery prospects in bankruptcy scenarios. Regulatory Environment

We assess the degree of creditor protection in this sector as average, which reflects our view that aircraft leasing firms may operate in a large number of Creditor Protection Average geographical regions with varying legal frameworks. For example, while the US may offer a degree of certainty on recovery prospects, emerging Asia may present a more challenging environment in default cases.

As discussed in the previous sections, the regulations applicable to the Institutional Framework Weak / Very Weak aircraft leasing industry are relatively light. Aviation authorities offer varying degrees of creditor protection from the lessor’s perspective.

Source: Pengyuan International

Business Profile Assessment

We believe that BOC Aviation has a more favorable business profile compared to many NBFI peers globally. Our assessment is based on our analysis of the company’s strengths and weaknesses across its strategic and risk framework, management and governance, and balance sheet management, as explained below.

Exhibit 3: Business Profile Assessment

Segment Sub-segment Risk Profile

As of the end of 2018, BOC Aviation ranked 10th globally in fleet size. It is noteworthy that the company maintains a young average fleet age of only three years and a high-quality asset portfolio, comprising Market Position mainly Boeing 737 and Airbus 320 planes. In our view, the company’s historically low lease termination rates may be a reflection of the quality of its client base, as well as its well-established customer relationships.

Strategic & Risk The company has a long track record of profitability, reflecting a sustainable long-term strategy that is unlikely to change in the next three to five years. We view favorably management’s strategy to maintain Framework Appropriateness of a high-quality aircraft portfolio, which has helped the company attract and retain a global client base. Strategy We have confidence that it would be likely for management to continue to hit its ROAE, ROAA, cash collection and termination rate targets.

The company has a relatively low risk appetite, which is reflected in its client acquisition strategy and Risk Preference prudent financial management in improving its asset-liability profile over the last few years.

BOC Aviation has a seasoned senior management team, with extensive experience in the financial Management and Quality, Consistency and leasing industries and long experience with the BOC group or the company itself. In our opinion, Governance And Continuity it is likely that the management team will remain largely unchanged in the next three to five years.

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BOC Aviation is governed by Hong Kong listing rules with regards to corporate governance. We believe the appointment of a non-executive chairman and other non-executive board members provide BOC Governance Structure with a high degree of oversight over the firm’s strategic decisions. In view of the company’s stable shareholder dividend payouts, sufficient capital adequacy and diversified funding sources, we regard its overall governance structure to be largely in line with international industry standards.

BOC Aviation has a strong financial risk oversight function, as indicated by its track record of Risk Oversight maintaining a strong profitability and capitalization profile. However, the concentration of suppliers is an operational risk intrinsic to the industry that may be challenging to manage. The grounding of Boeing 737 Max and the delivery delays of this aircraft in 2019 attest to the risks in the business model.

The company’s fleet of aircraft is, by far, the largest component of the firm’s balance sheet and source Asset Risk of asset risk. From an accounting perspective, we view the firm’s depreciation schedule to be Management conservative relative to the appraisal and disposal values of the aircraft. We believe the firm’s asset portfolio is of high quality and should be relatively marketable even in a stress scenario.

The company has robust funding risk management capabilities, with a well-diversified maturity profile. As of 1H19, the sources of debt comprised notes (62%), loans (28%), export credit agencies (5%), and BOC (5%). After the use of interest rate swaps, 73% of interest-bearing liabilities were fixed-rate and Funding Risk Balance Sheet 27% floating-rate. This payment profile compares favorably against the firm’s lease portfolio, which Management Management was 79% fixed-rate and 21% floating-rate. More than 90% of mismatch interest-rate exposure is hedged. The firm’s committed revolving credit limits, global medium-term note (GMTN) programs, the potential for asset-backed securities (ABS) issuance, and implicit support from BOC all give us comfort that its funding risks are adequately managed.

We believe BOC Aviation’s capital management is adequate, given its five-year time-weighted interest Capital coverage ratio and capital adequacy ratio of above 4x and 22% respectively. Under the company’s Management interest rate sensitivity analysis at the end of 2018, a 25bps change in interest rates was only equivalent to 0.5% of shareholders’ equity.

Source: Company, Pengyuan International

Capital Formation

We consider BOC Aviation’s capital formation capacity to be strong, based on our absolute benchmarks on returns on assets and equity. Our assessment also covers industry and company-specific earnings drivers, including net lease yield, fee income contribution, aircraft disposal margin, cost-income ratio, degree of diversification and dividend payout policy.

The aircraft operating lease industry is asset-heavy and we believe ROAA would be a key measure of the efficiency of fleets under management. In our analytical horizon of 2017 to 2021, BOC Aviation’s five-year time-weighted average ROAA and ROAE are expected to be 3.6% and 15.2% respectively. Compared with its peers globally, we believe the firm’s profitability profile will remain resilient, driven by a favorable industry outlook and its strong operational management.

Our earnings evaluation takes into account the firm’s net lease yields (NLYs) to capture its pricing power and funding capability. We expect that the firm’s time-weighted average NLY over our analytical horizon to be 8.6%, reflecting its high-quality and young fleet, as well as a more resilient funding profile as it restructures its financing mix.

In terms of aircraft disposal gains, the company consistently reported a sale premium of around 10% over net book value from 2015 to 1H19. Together with a profit margin of above 12% on aircraft disposals, we believe the company will continue to derive a meaningful income stream from disposals.

BOC Aviation has maintained a low cost-income ratio at a five-year time-weighted average of 12.8%. We note that staff costs are the largest component of operating expenses and view the company’s key performance indicators positively. It is noteworthy, for instance, that the company made a profit of USD321 million in 1H19 (8.1% year-on-year growth), while staff costs decreased by 8.9% to about USD37 million over the same period, mainly on account of aircraft delivery delays, which weighed on staff bonuses.

The firm’s earnings capacity is supported by the diversification of its business, with a client base of 92 airlines based in 40 countries. By net book value of its lease portfolio, each client constituted no more than 10% of its book as of the middle of 2019. We believe this high level of diversification would substantially limit its earnings risk.

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In terms of earnings retention, BOC Aviation has an internal guideline to maintain a dividend payout ratio of 35% or below. The company has followed this dividend payout policy since its IPO. According to management guidance at the 1H19 analyst briefing, we expect this policy to remain in place in the next 12 months.

Overall, our analysis of the firm’s capital formation capacity is a key positive rating factor contributing to its capital risk score.

Exhibit 4: Key Capital Formation Metrics

2017A 2018A 2019E 2020E 2021E

USD million Revenue 1,401 1,726 1,973 2,222 2,534 Net Lease Income 1,024 1,190 1,344 1,515 1,684 Average Lease Assets 11,933 14,193 15,624 17,613 19,577 Total Assets 16,040 18,256 20,089 22,715 24,551 Total Equity 3,819 4,199 4,670 5,160 5,737

% Net Lease Yield 8.5 8.6 8.6 8.6 8.6 Fee Income / Revenue 1.9 4.5 3.8 3.8 3.7 Aircraft Disposal Margin 14.9 13.1 12.5 12.5 12.5 Cost-income Ratio 8.5 8.4 18.0 18.0 18.0 ROAE 16.3 15.5 15.3 15.2 16.1 ROAA 4.0 3.6 3.5 3.5 3.7 Dividend / Net Profit 35.0 35.0 35.0 35.0 35.0 Source: Company financials, Pengyuan International estimates

Capital Adequacy

We expect BOC Aviation’s capital adequacy to remain adequate, relative to our absolute benchmarks on capital adequacy ratio (CAR) and our analysis of the company’s asset quality, funding and liquidity.

Our assessment of BOC Aviation’s capital adequacy is based on our analysis of its CAR and net debt to EBITDA ratio from 2017 to 2021, which, on a time-weighted basis, are expected to be 22.3% and 7.3x respectively. While the firm’s net debt to EBITDA ratio may appear high on an absolute basis and relative to lighter-asset business models, we believe its CAR may be a better reflection of its stable long-term cashflow.

We identify BOC Aviation’s high asset quality as a credit positive. We consider the firm’s aircraft valuation above net book value, fleet utilization rate, and security deposits-to-trade and other receivables ratio to be favorable, at a time-weighted average of 10.4%, 99.7%, 15.6x respectively from 2017 to 2021. With a consistent market value premium over aircraft net book value, we are of the view that BOC Aviation has taken a conservative valuation approach. Together with its discounted lease income cashflow stream, we believe the firm’s asset quality will continue to support a stable capitalization.

However, BOC Aviation’s liquidity coverage is relatively weak while its interest coverage is adequate, owing to the nature of its operating model. On a time-weighted basis, we expect the firm’s liquidity coverage ratio and interest coverage ratio to be 21.9% and 4.2x respectively from 2017 to 2021. Under a distressed scenario, we believe contingency funding from BOC Aviation’s parent could provide liquidity relief. The company may also monetize its assets via ABS issuance, should the need arise.

Exhibit 5: Key Capital Adequacy Metrics

2017A 2018A 2019E 2020E 2021E

% Capitalization / Leverage Ratios Capital Adequacy Ratio 22.8 22.3 22.4 21.9 22.4 Net Debt / EBITDA (x) 8.1 7.6 7.2 7.2 6.7

Asset Quality Aircraft Premium Over NBV 12.7 10.7 10.0 10.0 10.0 Fleet Utilization Rate 99.8 99.9 99.5 99.8 99.8 Security Deposit-to-Trade & Other Receivables (x) 11.7 28.0 12.0 13.0 13.6

Funding and Liquidity Interest Coverage (x) 4.9 4.5 4.0 4.0 4.2 Liquidity Coverage Ratio 21.1 16.4 26.0 22.2 18.9 Source: Company, Pengyuan International

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Peer Comparison

Compared to other aircraft operating leasing companies globally, we consider BOC Aviation’s scale, track record and operating performance to be above average. One of BOC Aviation’s competitive strengths lie in its strong market position and well-established strategy. In particular, BOC Aviation manages a younger fleet compared with many of its competitors. BOC Aviation’s high-quality asset portfolio will continue to translate into stronger pricing power. In terms of profitability, we note that BOC Aviation benefits from a stable NLY. Although financing costs may continue to rise due to a shift towards fixed-rate funding, the benefits will outweigh the costs.

Exhibit 6: Peer Comparison

BOC Fly Leasing SMBC Avation Aircastle Air Lease AerCap (1) Aviation (2) Aviation (3) PLC (4) Ltd (5) Corp (6)

Total Assets (USD million) 2014 11,403 43,720 4,218 9,432 416 6,175 10,691 2015 12,474 43,749 3,424 9,922 586 6,570 12,355 2016 13,445 41,620 3,447 10,637 832 7,245 13,976 2017 16,040 42,040 3,596 10,702 896 7,199 15,614 2018 18,256 43,209 4,226 12,566 1,152 7,871 18,482 2019* 19,162 43,068 3,945 NA 1,256 8,634 20,484

ROAE (%) 2014 15.3 15.8 8.0 13.6 16.1 6.0 9.7 2015 15.1 14.5 3.2 12.6 11.7 6.9 8.8 2016 14.4 12.4 -4.7 16.6 5.2 8.3 11.7 2017 16.3 12.6 0.5 14.5 11.5 7.9 20.1 2018 15.5 11.7 13.8 11.7 9.4 12.6 11.4 2019* 15.5 13.1 14.8 NA 12.3 6.6 10.9

ROAA (%) 2014 2.9 3.1 1.5 1.9 3.5 1.6 2.6 2015 2.9 2.7 0.6 1.8 2.6 1.9 2.2 2016 3.2 2.5 -0.8 2.6 2.6 2.2 2.9 2017 4.0 2.6 0.1 2.6 2.5 2.1 5.1 2018 3.6 2.4 2.2 2.5 2.0 3.3 3.0 2019* 3.5 2.7 2.6 NA 2.3 1.7 2.8

Shareholders’ Equity / Total Assets (%) 2014 18.4 18.0 17.9 13.8 23.1 27.9 25.9 2015 19.6 19.1 19.2 14.8 21.6 27.1 24.4 2016 25.2 20.5 17.2 16.8 20.9 25.3 24.2 2017 23.8 20.4 15.1 18.8 21.9 26.5 26.4 2018 23.0 20.4 16.6 23.1 19.8 25.5 26.0 2019* 22.4 20.9 19.1 NA 19.2 23.4 25.9

Net Lease Yield (%) 2014 8.3 9.8 7.8 6.1 9.1 8.3 9.3 2015 8.3 9.8 9.0 6.6 9.5 8.3 9.2 2016 8.3 9.5 7.2 7.3 7.3 7.8 9.2 2017 8.5 9.0 7.7 7.0 7.2 7.7 9.2 2018 8.6 8.4 8.2 6.8 6.3 7.4 8.9 2019* 8.3 8.0 7.5 NA 5.5 6.8 8.6

Cost of Debt (%) 2014 2.0 3.6 5.1 4.5 6.2 4.2 3.1 2015 2.0 3.6 5.4 4.2 5.3 6.3 3.3 2016 2.5 3.7 5.0 4.5 5.5 5.8 3.1 2017 2.7 3.9 4.9 4.2 6.5 5.5 2.8 2018 3.1 4.1 5.1 5.2 5.9 5.3 2.9 2019* 3.5 4.3 6.2 NA 6.0 5.4 3.1 (1) AerCap: Not Rated; (2) FLY Leasing Limited: Not Rated; (3) SMBC Aviation Capital: Not Rated; (4) Avation PLC: Not Rated; (5) Aircastle Limited: Not Rated; (6) Air Lease Corporation: Not Rated * Based on reported figures in FY2019 or Pengyuan International Estimates Source: Company, Pengyuan International

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Scorecard Summary

Analytical Component Score / Rating Comments

Pillar 1: We consider the global aircraft leasing industry to have adequate structural stability, due to its the high entry barriers and strong growth fundamentals. These NBFI Industry Credit Index bb+ strengths are partially offset by the industry’s procyclicality, asset-heavy (NICI) Score business model and continued uncertainties around the Boeing 737 Max aircraft.

Pillar 2: BOC Aviation has a strong business profile, a leading position in the industry Business Profile Assessment 8 / 11 and a long track record of success. The assessment is supported by its leading Score market share, high-quality portfolio and effective balance sheet management.

Business Risk Score (BRS) of ‘bbb’ is derived from combination of Pillar-1 score Business Risk Score (BRS) bbb of ‘bb+’ and Pillar-2 score of ‘8’.

We consider BOC Aviation’s capital formation capacity to be strong, based on our absolute benchmarks on return on assets and equity. Our assessment also Pillar 3: 9 / 11 covers industry and company-specific earnings drivers, including net lease yield, Capital Formation Score fee income contribution, aircraft disposal margin, cost-income ratio, degree of diversification and dividend payout policy.

Impact on Capital Adequacy +2 A 2-point uplift is assigned to Capital Adequacy.

We expect BOC Aviation’s capital adequacy to remain adequate, relative to our Pillar 4: 5 / 11 absolute benchmarks on capital adequacy ratios and our analysis of the Capital Adequacy Score company’s asset quality, funding and liquidity.

Capital Risk Score (CRS) bbb- A combination of Pillar-3 and Pillar-4 scores drive a CRS of ‘bbb-’.

Indicative Credit Score (ICS) bbb Our four-pillar analysis yields an ICS of ‘bbb’.

Standalone Credit Profile Our ICS adjustment analyses result in no net adjustment to the ICS and lead to bbb (SACP) a standalone credit profile of ‘bbb’.

The rating takes into account the extraordinary support from the company’s parent, Bank of China Ltd (BOC). We are of the view that BOC has a strong External Support Analysis +2 willingness to support BOC Aviation in a distressed scenario, given the latter’s importance within the group and potential reputation risks associated with a failure of BOC Aviation.

LTICR A- We have assigned a first-time global-scale LTICR of ‘A-’ with a Stable Outlook.

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Financial Statements

Income Statement (USD million) 2017A 2018A 2019E 2020E 2021E

Interest Income 1,286 1,546 1,795 2,023 2,249 Interest Expense (260) (353) (448) (505) (561) Net Interest Income 1,027 1,193 1,347 1,518 1,688

Fee & Commission Income 27 77 75 84 94 Fee & Commission Expense - - - - - Net Fee & Commission Income 27 77 75 84 94

Net Gain on Sales of Aircrafts 78 91 89 94 165 Other Operating Income 10 11 15 21 27 Other Income 88 102 104 115 191

Depreciation of Plant and Equipment (460) (543) (596) (697) (788) Impairments (11) - (16) (17) (18) Operating Expenses (119) (145) (165) (178) (196)

NET INCOME BEFORE TAX 551 685 748 825 971 Income Tax Expense 36 (65) (71) (78) (92) NET INCOME 587 620 677 746 879 Source: Company, Pengyuan International

Balance Sheet (USD million) 2017A 2018A 2019E 2020E 2021E

Cash & Bank Balances 305 243 405 424 453 Finance Lease Receivables 16 - - - - Other Receivables 20 10 13 14 12 Assets Held for Sales 239 - - - - Aircrafts NBV 15,432 17,971 19,644 22,248 24,056 Other Assets 48 42 41 43 42 Total Assets 16,040 18,256 20,089 22,715 24,551

Loans and Borrowings 10,682 12,279 13,315 15,130 16,047 Finance Lease Payables 58 - 70 72 69 Maintenance Reserves 559 732 815 947 1,112 Security Deposits 229 269 326 379 404 Other Payables 138 158 165 181 213 Deferred Income Tax Liabilities 296 305 372 416 479 Other liabilities 259 315 357 431 490 TOTAL LIABILITIES 12,221 14,057 15,419 17,555 18,814

TOTAL EQUITY 3,819 4,199 4,670 5,160 5,737 Source: Company, Pengyuan International

Related Criteria

Global NBFI Rating Criteria (15 Jun 2018)

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Financial Institutions Singapore

DISCLAIMER

Unsolicited ratings – non-participative rating

Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”, “we”, “us”, “our”) publishes credit ratings and reports based on the established methodologies and in compliance with the rating process. For more information on policies, procedures, and methodologies, please refer to the Company’s website www.pyrating.com. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.

All credit ratings and reports are subject to disclaimers and certain limitations. CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.

CREDIT RATINGS ADDRESS ONLY CREDIT RISK. THE COMPANY DEFINES THE CREDIT RISK AS THE RISK THAT THE RATED ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS MUST NOT BE CONSIDERED AS FACTS OF A SPECIFIC DEFAULT PROBABILITY OR AS A PREDICTIVE MEASURE OF A DEFAULT PROBABILITY. Credit ratings constitute the Company’s forward-looking opinion of the credit rating committee and include predictions about future events which by definition cannot be validated as facts.

For the purpose of rating process the Company obtains sufficient quality factual information from sources believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The issuer and its advisors are ultimately responsible for the accuracy of the information provided for the rating process.

Users of the Company’s credit ratings should refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.

The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.

The Company does not receive compensation for its unsolicited credit ratings. The rated entity did not participate in the rating process. The unsolicited credit rating has not been disclosed to the rated entity or to its related party and, following such disclosure, the credit rating has not been amended before being issued.

The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.

The Company’s credit ratings and reports are not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor to ensure compliance with applicable laws and regulations.

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