January 22, 2018 / 10:06 PM / a month ago

Stronger shield from HNA would benefit Avolon, rating experts say

DUBLIN (Reuters) - Irish aircraft leasing firm Avolon is sheltered from problems facing its Chinese parent HNA Group, but its credit profile would benefit from a guarantee that it would not be forced to bail out the group, ratings analysts said on Monday.

China’s aviation-to-financial services conglomerate HNA Group last week acknowledged liquidity problems after a merger spree and a slowdown in Chinese growth.

Bohai Capital Holding, which is controlled by HNA, bought Avolon in 2015 for $2.5 billion. Avolon then bought the aircraft leasing arm of CIT Group for $10 billion to create the world’s third-largest aircraft leasing company.

Avolon has no immediate need to raise funds after repricing loans and tapping capital markets before concerns over HNA first flared up, said Mark Wasden, senior analyst at Moody’s Investors Service, which rates Avolon at Ba2 with a stable outlook.

“I am not sure if they would be able to pull that off in today’s environment,” he told the Airline Economics conference.

He and other rating agency officials told the conference Avolon was in no immediate danger of seeing its rating downgraded, but that its upward trajectory was constrained by the lack of guaranteed insulation from Bohai Capital and HNA.

“On a standalone basis Avolon is a fine company but parent liquidity issues are imposing on them some constraints regarding their funding profile today,” Wasden said.

“If they created a more robust covenant structure that created greater and more resilient separation from their parent company Bohai Capital and HNA that would be helpful,” he added.

Avolon could not immediately be reached for comment

HNA’s leverage has alarmed some analysts and its “aggressive financing policy” caused S&P Global Ratings in November to downgrade the company. HNA has also raised funds by selling expensive short-term debt and pledging more shares for loans.

Last month Fitch Ratings said that its BB rating for Avolon Holdings would be increasingly affected by HNA’s financial situation, questioning the independence of the unit’s decision-making process and segregation of financial resources from HNA.

“A restrictive covenant would probably provide more teeth in terms of insulation,” Fitch analyst Sean Pattap told the Airline Economics conference on Monday.

Still, Marjan Riggi, managing director at Kroll Bond Ratings, which rates Avolon BBB+, questioned whether HNA would act to lower the value of Avolon, seen by many as a key asset.

“They paid up so much for the company that they are going to try to deal with it in a way that would provide the best value for the company,” she told the conference.

Even asking Avolon to pay dividends to Bohai, which it does not currently do, would make little difference, she said.

”HNA is so huge that these small amounts are not going to make or break the issues that they are experiencing in China.

“I think the solution will have to come from China and that somehow internally they will deal with it,” she added.

Reporting by Tim Hepher; Editing by Conor Humphries

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