Fitch Ratings-New York-06 December 2017: Avolon Holdings Limited's (BB/Stable) ability to adhere to its structural separation from its direct owner, Bohai Capital Holding Co., Ltd. and Bohai's majority owner, HNA Group Co. Ltd. will be an increasingly key driver of the company's future rating trajectory, according to Fitch Ratings.

Recent developments with respect to certain HNA subsidiaries indicate increased constraints on the overall organization and increase the potential for additional capital or liquidity calls on Avolon, in Fitch's opinion. Recent developments at certain subsidiaries include reduced funding access (higher cost and/or shorter maturity), increased intercompany loan activity and a reported delay in aircraft lease payments by certain HNA-owned airlines. HNA does not publicly disclose its financial results, making it challenging to draw definitive conclusions about its current liquidity position.

In third quarter 2017, Avolon originated $365 million of intercompany loans to Bohai using cash and available undrawn debt facilities. The intercompany loans were used to provide financing to Hong Kong Bohai Leasing Asset Management Corp., Ltd., a Bohai subsidiary, in relation to a capital structure re-profiling by Hong Kong Bohai. Fitch viewed this transaction as one-time in nature.

That being the case, if Avolon originates additional intercompany loans to HNA or Bohai, it could call into question the independence of Avolon's decision-making process and the segregation of its financial resources from its owners, thereby pressuring Avolon's ratings to a level more closely aligned with the broader HNA/Bohai organization. Fitch does not publicly rate HNA or Bohai, but views the entities to have highly speculative risk profiles, lower than Avolon's current ratings.

On the other hand, Avolon's ratings could benefit from the maintenance of a strong separation framework, including the absence of recurring material draws on Avolon's financial resources by its owners, combined with execution on planned deleveraging at Avolon, resulting in debt/tangible common equity approaching the company's stated leverage target of 2.5x-3.0x, and execution on planned deleveraging at Bohai, resulting in reduced double leverage.

Fitch currently views Avolon's credit profile primarily on a standalone basis. Avolon has a board of directors on which HNA and Bohai have a minority presence, clearly articulated financial targets, and independent access to the capital markets. In September, Avolon priced $1.25 billion of senior unsecured notes and re-priced its $5 billion senior secured term loan B-2 facility, and in November re-priced and partially repaid its $500 million senior secured term loan B-1 facility.

Avolon's 'BB' IDR reflects its high-quality commercial aircraft portfolio; enhanced scale following the acquisition of CIT Group Inc.'s aircraft leasing business in April 2017; strong profitability; robust risk controls; and strong management track record. The ratings are constrained by Avolon's predominantly secured, wholesale funded debt profile; elevated leverage; aggressive growth via its order book and stated acquisition appetite; and qualitative considerations surrounding Avolon's still new ownership structure.

Fitch currently rates Avolon as follows:

Avolon Holdings Limited
--Long-Term IDR 'BB'; Outlook Stable;
--Senior secured debt 'BB+'.

Avolon TLB Borrower 1 (Luxembourg) S.a.r.l.
--Long-Term IDR 'BB'; Outlook Stable;
--Senior secured debt 'BB+'.

Avolon TLB Borrower 1 (US) LLC
--Long-Term IDR 'BB'; Outlook Stable;
--Senior secured debt 'BB+'.

CIT Aerospace International
--Senior secured debt 'BB+'.

CIT Aerospace LLC
--Senior secured debt 'BB+'.

CIT Aviation Finance III Limited
--Senior secured debt 'BB+'.

CIT Group Finance (Ireland)
--Senior secured debt 'BB+'.

Park Aerospace Holdings Limited
--Long-Term Issuer Default Rating 'BB'; Outlook Stable;
--Senior unsecured notes 'BB'.

Avolon is headquartered in Ireland and is a wholly owned indirect subsidiary of the Chinese public company, Bohai Capital Holding Co., Ltd. Avolon was the world's third largest aircraft leasing business as of Sept. 30, 2017, with 915 owned, managed and committed aircraft and total assets of $27.5 billion.