Hong Kong, October 11, 2017 -- Moody's Investors Service has assigned a (P)A2/(P)P-1 backed senior unsecured program rating to CDBL Funding 1's medium term note (MTN) program supported by a keepwell structure, and a (P)A1/(P)P-1 backed senior unsecured program rating to the company's MTN program supported by a guarantee, provided by China Development Bank Financial Leasing Co., Ltd. (CDB Financial Leasing, A1 stable).
CDBL Funding 1, incorporated in the Cayman Islands, is wholly owned by CDB Aviation Lease Finance Designated Activity Company (CDBALF, unrated), which is in turn wholly owned by CDB Financial Leasing.
The ratings outlook is stable.
MTN PROGRAM SUPPORTED BY A KEEPWELL STRUCTURE
CDBL Funding 1's (P)A2/(P)P-1 backed senior unsecured MTN program rating reflects CDB Financial Leasing's ability and very high willingness to support CDBL Funding 1's notes to be issued under the program.
CDBL Funding 1, a special purpose vehicle, is wholly owned by CDBALF, which in turn is wholly owned by CDB Financial Leasing and acts as the operational platform for CDB Financial Leasing's aircraft leasing business.
CDBALF is strategically important to CDB Financial Leasing's aircraft leasing business. Moody's believes that a failure by CDB Financial Leasing to support CDBL Funding 1's notes would result in significant reputational and operational risk that would negatively affect CDB Financial Leasing's ability to access the onshore and offshore bond and bank loan markets.
The notes to be issued under the MTN program will be guaranteed by CDBALF and supported by a keepwell and asset purchase deed between CDBL Funding 1, CDBALF, CDB Financial Leasing and the MTN program trustee.
Moody's believes that the deed reinforces CDB Financial Leasing's willingness to support the notes. Under the deed, CDB Financial Leasing has committed to:
(1) ensure that CDB Financial Leasing directly or indirectly controls CDBALF and CDBALF owns all the outstanding shares of CDBL Funding 1;
(2) maintain CDBALF as a primary overseas leasing platform and flagship overseas holding subsidiary;
(3) ensure that CDBALF and CDBL Funding 1 are solvent; and
(4) agree to purchase assets held by CDBALF and its subsidiaries in the event of a default.
The one-notch difference between CDB Financial Leasing's A1 long-term issuer ratings and CDBL Funding 1's (P)A2 program rating reflects: (1) the potential different priority of claims for noteholders — relative to CDB Financial Leasing's senior unsecured creditors — in the absence of a guarantee from CDB Financial Leasing; and (2) uncertainties over the ability of the keepwell provider to obtain approval to transmit resources to the offshore platform, given China's capital account regulations.
In Moody's view, while the deed demonstrates CDB Financial Leasing's willingness to support its overseas subsidiaries and the securities under the MTN program, it is different from an explicit guarantee in terms of the nature of judgment and procedures of enforcement. The final result of such a legal claim is unclear, given a lack of precedent litigation against Chinese corporations on such agreements.
What Could Change the Rating - Up/Down
An upgrade of CDB Financial Leasing's issuer rating, or the provision of a direct guarantee by CDB Financial Leasing, could trigger an upgrade in the ratings of MTN program.
The rating of the MTN program could be downgraded if: (1) CDB Financial Leasing's issuer rating is downgraded; (2) CDB Financial Leasing's ability and willingness to support the obligations weaken; or (3) there is a material adverse change in shareholding structure or regulations, which limits CDB Financial Leasing's willingness and ability to provide timely support to meet the payment obligations on the notes.
MTN PROGRAM SUPPORTED BY A GUARANTEE
The (P)A1/(P)P-1 backed senior unsecured MTN program rating takes into account an unconditional irrevocable guarantee from CDB Financial Leasing and is in line with CDB Financial Leasing's A1/P-1 issuer rating.
The notes to be issued under this MTN program will be fully and unconditionally guaranteed by CDB Financial Leasing. The guarantee will represent an unsubordinated and unsecured obligation of CDB Financial Leasing. As such, obligations under the guarantee will rank pari passu with CDB Financial Leasing's existing and future unsecured and unsubordinated obligations.
Moody's has reviewed the guarantee provided by CDB Financial Leasing for the MTN program, and concluded that the terms and conditions of the guarantee satisfy Moody's core principles of guarantees.
The notes to be issued under the MTN program will carry a provisional rating because the guarantee needs to be registered with China's State Administration of Foreign Exchange (SAFE). Moody's expects to assign a definitive rating to the notes, upon the completion of registration of the guarantee by CDB Financial Leasing with SAFE.
What Could Change the Rating — Up/Down
The notes to be issued under the MTN program will be unconditionally and irrevocably guaranteed by CDB Financial Leasing. The factors that can cause CDB Financial Leasing's ratings to be upgraded and downgraded will also drive this MTN program and note ratings.
Ratings on individual notes issued under the program will be subject to Moody's satisfactory review of the terms and conditions set forth in the final base and supplementary offering circular, and the pricing supplements of the notes to be issued.
In addition, Moody's does not intend to assign ratings to notes for which payment of principal or interest is variable and contractually dependent on the occurrence of a non-credit-linked event or the performance of an index (non-credit-linked notes). The only exception will be for notes whose principal and coupon payments are affected by standard sources of variation.
For more information, please see Moody's Cross-Sector Rating Methodology: "Rating Obligations with Variable Promises", published in April 2016, and "Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts", published in May 2017.
The principal methodology used in these ratings was Finance Companies published in Decemebr 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
China Development Bank Financial Leasing Co., Ltd. is headquartered in Shenzhen. It reported assets of RMB173 billion at end-June 2017.
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