BoCom Leasing Management Hong Kong Co. Ltd. Rated #A-#; Guaranteed MTN Program And Drawdown Rated #A-#; Outlook Stable

Stocks and Financial Services Press Releases Thursday January 11, 2018 18:07
HONG KONG--11 Jan--S&P Global Ratings

HONG KONG (S&P Global Ratings) Jan. 11, 2018--S&P Global Ratings today assigned its 'A-' long-term and 'A-2' short-term issuer credit ratings to Hong Kong-based BoCom Leasing Management Hong Kong Co. Ltd. (BoCom Leasing Management HK). The outlook on the long-term rating is stable.

We also assigned our 'A-' long-term and 'A-2' short-term issue ratings to a US$7 billion medium-term note (MTN) program that BoCom Leasing Management HK guarantees. Azure Orbit IV International Finance Ltd., a special purpose vehicle indirectly owned by Bank of Communications Co. Ltd. (BoCom), issues notes under the MTN program. We also assigned our 'A-' long-term issue rating to a proposed drawdown under the MTN program. Our issue ratings are subject to our review of the final documentation related to the transaction.

The rating on BoCom Leasing Management HK reflects our view that the company is a core subsidiary of BoCom Financial Leasing Co. Ltd. (BoComFL: A-/Stable/A-2), and in turn, core to the ultimate parent bank, Bank of Communications Co. Ltd. (BoCom: A-/Stable/A-2). We therefore equalize our ratings on BoCom Leasing Management HK with those on its ultimate parent. We also expect that potential extraordinary government support to BoCom will be indirectly available to the company through BoComFL, if needed. BoCom Leasing Management HK is wholly owned by BoComFL through an intermediate holding company, BoCom Aviation and Shipping Financial Leasing Co. Ltd., in the Shanghai Free Trade Zone.

BoCom Leasing Management HK is set up for regulatory and tax reasons as financial leasing offshore subsidiaries were only permitted by the regulator in late 2014 and Hong Kong tax incentives for ship leasing around the time. BoCom Leasing Management HK is the principal subsidiary to consolidate and expand BoComFL's offshore ship leasing business. This is demonstrated by a bulk transfer of leasing assets at the beginning of 2017, plan to gradually take over a portion of the remaining shipping portfolio and plan to book future offshore ship leasing assets under the company, with the exception of cases with certain legal and tax considerations.

We view the company as a profit booking center of BoComFL that functions as a division with close association and strong integration with the onshore parent. BoCom Leasing Management HK shares the same management team as its onshore parent. The company only has two directors, who are also senior managers of BoComFL. Its overall credit profile is largely influenced by its onshore parent's business and how it organizes its onshore and offshore business lines.

We view offshore leasing operations as critical to BoComFL's growth strategy and key to the wider banking group's internationalization initiative. Offshore leasing also improves diversification at the banking group level. Similar to other financial leasing firms with a banking parent, shipping and aviation leasing are the core featured business of the leasing company's offshore operations. Specifically, the group plans to continue to prioritize operating leases and offshore leasing as key growth drivers, as it has in the past two years. In our view, the company is fully integral to the parent's operation and risk management framework. The offshore shipping operation has not incurred impairment losses since start of operations in 2014, largely thanks to the very young age of leasing assets and customer selection. However, it has yet to establish a track record over an economic cycle. The company has access to BoComFL's offshore credit facilities, including liquidity support from BoCom.

BoCom Leasing Management HK contributes significantly to BoComFL's leasing portfolio in terms of assets, despite a much smaller equity contribution. By end September 2017, the company accounted for about 6% of BoComFL's total assets and less than 1% of total equity. We expect both ratios to grow fast in the near future as the offshore operation would likely dominate the growth of BoComFL's shipping sector. As of June 2017, shipping accounted for 20.6% of BoComFL's total lease portfolio, of which 85% were offshore. We have equalized the ratings on the MTN program and proposed drawdown with the issuer credit rating on BoCom Leasing Management HK to reflect our view that the guarantee is irrevocable, unconditional, and timely, and therefore qualifies for rating substitution treatment. These obligations rank equally with all other unsecured and unsubordinated obligations of the guarantor.

BoComFL will use the proceeds from each issue from the MTN program primarily to fund the acquisition of leasing assets by the guarantor and other offshore operations. Index-linked notes may also be issued from the program, however, under our rating criteria, we do not rate the bonds if principal payments are linked to fluctuations in equity or commodity prices, or equity or commodity indices.

Ratings on individual notes will be subject to our review of their relevant pricing supplement and consideration of any potential sovereign rating caps. Under the program, the company may issue notes up to a maximum aggregate amount of US$7 billion with varying maturity.

The stable outlook on BoCom Leasing Management HK reflects our view that the company will remain a core subsidiary to BoComFL and, in turn, will be core to the BoCom group for the next 24 months. The ratings on BoCom Leasing Management HK will move in tandem with the credit profile of BoCom FL, which we equalize with that on BoCom.

We may lower the ratings on BoCom Leasing Management HK if the company's importance to the parent diminishes. This could occur, for example, if the group withdraws from overseas operations or overseas operations perform worse than we expect. We would also lower the ratings if we downgraded BoCom. An upgrade is unlikely in the next 24 months. We would raise the ratings if we upgraded BoCom.

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