NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned SMBC Aviation Capital Limited (SMBC AC) a Long-term Issuer Default Rating (IDR) of 'BBB'. The Outlook is Stable.

KEY RATING DRIVERS - IDR

SMBC AC's rating is based primarily on the company's strong linkage with its majority owner, Sumitomo Mitsui financial Group, Inc. (SMFG, rated 'A-'/'a-'; with a Stable Outlook by Fitch). Though presently representing only a small portion of SMFG's total assets, SMBC AC is viewed by Fitch as strategically important to SMFG and its core banking subsidiary Sumitomo Mitsui Banking Corporation (SMBC), given SMBC AC's fit with the broader company's strategic objective to diversify its business mix and invest outside of Japan in activities with different risk/return profiles relative to the group's traditional corporate financing business. Since SMFG's acquisition of SMBC AC in 2012, this strategic importance has been supported by an integrated strategy, consistent branding, parent company representation on SMBC AC's Board of Directors and parent-supported funding to SMBC AC.

Fitch considers SMBC AC to be a strategically important subsidiary of SMFG under its 'Rating FI Subsidiaries and Holding Companies' criteria which typically results in notching of one to two notches off of the parent company's long-term IDR. In SMBC AC's case, the IDR is notched down twice from SMFG's long-term IDR, reflecting that SMBC AC is not fully-owned by SMFG, it has a limited operating history under SMFG, it is small in size relative to the broader organization and it operates in a different jurisdiction.

SMBC AC has a seasoned management team and well-established aircraft leasing franchise with a 13-year track record and a developed institutional structure capable of supporting a large aircraft fleet. SMBC AC has been consistently profitable in every year of operation (excluding the effect of one-off breakage costs in relation to acquisition refinancing in 2013) with stable lease rates, limited asset impairment charges and stable funding costs. Furthermore, SMBC AC's customer base is well diversified by operator type and geography, with a number of relatively strong airline credits comprising the top exposures.

Fitch considers the quality of SMBC AC's aircraft fleet a rating strength, as the fleet is mostly unencumbered and primarily comprised of readily-tradable young, fuel efficient narrow body aircraft models. As of Sept. 30, 2014, 98% (as a % of net book value) of SMBC AC's fleet is comprised of Airbus A320 and Boeing 737 Next Generation family aircraft with a weighted average age of 4.6 years (based on net book value). SMBC AC has demonstrated an ability to successfully trade aircraft through a variety of market environments, selling 235 aircraft through Dec. 1, 2014 since its founding in 2001. Fitch views SMBC AC's demonstrated ability to execute on aircraft sales over time positively.

These strengths are counterbalanced by SMBC AC's concentrated funding profile, which lacks third-party funding, and its elevated balance sheet leverage. SMBC AC's funding base is highly concentrated and solely reliant on its parent company, SMFG. Leverage, defined as debt-to-tangible equity, on a consolidated basis was 5.9x at Sept. 30, 2014 and represented the highest leverage among Fitch-rated aircraft lessors. Fitch expects SMBC AC's balance sheet leverage to gradually decline over the next 2-3 years, although it will likely remain higher than would be expected for an investment grade rating, without factoring in institutional support.

Furthermore, in order to address its customers' anticipated demands, SMBC AC currently maintains a sizeable order book relative to the size of its balance sheet, which Fitch believes increases financing risk. That said, future aircraft deliveries appear well-laddered, such that their financing is expected to be manageable.

The Stable Outlook is consistent with SMFG's Outlook and reflects Fitch's expectation of a continued propensity and ability on the part of SMFG to support SMBC AC.

RATING SENSITIVITIES - IDR

Given that SMBC AC's rating is notched off of SMFG's rating, any movement in SMFG's IDR, positive or negative, would be likely to have a direct impact on SMBC AC's IDR.

Further, although not expected by Fitch, should SMFG seek to dispose of its investment in SMBC AC, or there be any other developments within SMFG which are perceived by Fitch to alter SMFG's willingness or ability to provide support to SMBC AC, SMBC AC's IDR could be adversely affected. Negative rating action could also be taken if SMBC AC's own operating performance deteriorated, thereby not delivering the return on investment envisaged by SMFG, to the extent that this impacted Fitch's assessment of the propensity of SMFG to provide support SMBC AC in case of need.

Absent upward movement in SMFG's IDR, positive rating action for SMBC AC would most likely be limited to an increase in Fitch's assessment of SMFG's propensity to support SMBC AC, in which case the notching between SMFG's rating and SMBC AC's rating could narrow. For example, consistent profitable growth within SMBC AC, such as to render it a more significant contributor to SMFG's overall business, could be beneficial to the ratings in the long term, especially if accompanied by a degree of earnings retention which served to reduce leverage.

Company Profile

SMBC AC is a leading global aircraft leasing company. As of November 2014 the company owned and managed 377 aircraft valued at over $15 billion on lease to airline customers in over 40 countries. The company also had commitments to purchase 218 aircraft worth over $22 billion from Airbus and Boeing in the coming years. SMBC AC's strategy is to focus on in-demand modern, fuel efficient aircraft types while working closely with its airline and investor customers to meet their individual requirements.

SMFG was created in 2002 as a holding company for Sumitomo Mitsui Banking Corporation (SMBC) and is one of the largest financial services institutions in the world, with assets of over $1.6 trillion, over 66,000 employees and is listed on the Tokyo, New York, Osaka and Nagoya stock exchanges. The companies of SMFG offer a diverse range of financial services, centering on banking operations and include credit card services, leasing, information services and securities.

Fitch assigns the following rating with a Stable Outlook:

SMBC Aviation Capital Limited

--Long-term IDR 'BBB'

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);

--'Rating FI Subsidiaries and Holding Companies' (August 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=940255

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