OREANDA-NEWS. Fitch Ratings has upgraded AVIC International Holding Corporation's (AVIC International) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating to 'BBB+' from 'BBB'. The Outlook is Stable.

The upgrade reflects Fitch's reassessment of AVIC International's notching from its parent, Aviation Industry Corporation of China (AVIC). In our view, rating AVIC International at two levels below AVIC would be more consistent with the rated universe in terms of applying a top-down approach and parent-subsidiary linkage.

AVIC International's notching reflects its lower revenue contribution to its parent from its core aviation segment and its lack of a core aviation manufacturing operation. In comparison, Sinofert Holdings Limited (Sinofert), which is rated one level below its parent Sinochem Hong Kong (Group) Company Limited (Sinochem HK), derives the majority of its revenue from its core fertilizer business. AVIC International's assets, revenue and profit as a percentage of those of its parents' are also lower, compared to COFCO (Hong Kong) Limited's (COFCO HK), which is rated one level below its parent COFCO Corporation (COFCO).

On the flip side, AVIC International has an integral position within AVIC through its key roles in developing overseas markets, setting up related businesses and expanding international investment in the global aviation industry. It is also tightly integrated into AVIC's core aviation manufacturing business in terms of subcontracting/outsourcing activities. Therefore, Fitch believes a two-level notch-down from its parent's rating would be more comparable with the rated universe.

KEY RATING DRIVERS
Top-Down Approach: AVIC has a 62.52% stake in AVIC International, and Fitch has notched the latter's IDR two levels below the internal assessment of its parent's credit profile. The Stable Outlook reflects Fitch's expectation of AVIC's continuous support to AVIC International.

AVIC's credit profile is in turn assessed by notching down one level from China's Long-Term Issuer Default Rating (A+/Stable) to reflect the very strong linkage between AVIC and its 100% parent, the State-owned Assets Supervision and Administration Commission (SASAC).

Parent Pivotal to China's Defence: AVIC is of very high strategic importance to China's national defence. AVIC, which was originally a state-owned aircraft manufacturer, is the backbone of China's military and civilian aviation manufacturing industry. It has a monopoly in military aircraft and short-range missile manufacturing output and maintenance, with an 80%-90% share of the country's civilian aviation manufacturing output.

Strong Linkages with Parent: AVIC International is a core unit of and has strong operational and strategic ties with AVIC. It is responsible for importing all of AVIC's key material/parts, exporting 80% of AVIC's products/services and 75% of AVIC's subcontracting/outsourcing business. As AVIC monopolises the domestic market, AVIC International is in essence the only link between China and the global aviation industry. In addition to its financial contribution, the subsidiary is also indispensable to AVIC's aviation operations.

Strong operational ties are evident in AVIC's management control over AVIC International, and AVIC's highly controlled centralised treasury management of subsidiaries' funds through AVIC Finance Co., Ltd, a licensed finance company. In addition, AVIC International is positioned by AVIC as its only strategic platform for globalisation and diversifying into non-aviation related sectors (except financial services).

Direct Support from AVIC to Continue: Between 1983 and 2000, AVIC provided guarantees to all of AVIC International's bank loans. AVIC also provided unconditional and irrevocable full guarantees for AVIC International's onshore bond offerings in 2006 and 2010, and its US dollar loan to acquire US-based Continental Aviation Engine in 2011. AVIC International has not only benefitted from the parent's reputation and referrals in bank borrowings, but also enjoyed guarantees from AVIC for banking facilities of CNY70bn from the Export-Import Bank of China (A+/Stable), a policy bank fully owned by the Chinese government. Fitch expects AVIC to continue to provide guarantees for AVIC International's borrowings when necessary.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue mix in the period up to 2016 to remain similar to that in 2013
- EBITDAR margin to be stable up to 2016
- Working-capital turnover days to remain stable

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Negative rating action on the Chinese sovereign
- A sharper growth slowdown than currently anticipated, leading to a materialisation of risks to financial and/or social stability
- A rise in estimated general government indebtedness well above Fitch's current estimate
- Sustained capital outflows sufficient to erode China's external balance-sheet strengths, or undermine financial stability
- Weakening linkages between AVIC International and AVIC
- Weakening linkages between AVIC and the Chinese sovereign

- A change in policy direction that signalled decreased willingness to tackle the economy's imbalances and vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Increased evidence that the economy can adjust smoothly while rebalancing without experiencing a disruptive "hard landing"
- Greater confidence that the debt problem in the broader economy can be resolved without a material negative impact on growth or financial stability
- Widespread adoption of the renminbi as a reserve currency globally
- Strengthening linkages between AVIC International and AVIC
- Strengthening linkages between AVIC and the Chinese sovereign

FULL LIST OF RATING ACTIONS
AVIC International
- Long-Term Foreign-Currency IDR rating upgraded to 'BBB+' from 'BBB', Outlook Stable
- Long-Term Local-Currency IDR rating upgraded to 'BBB+' from 'BBB', Outlook Stable
- Senior unsecured rating upgraded to 'BBB+' from 'BBB'

AVIC International Finance Limited
- USD150m 3.3% senior unsecured notes due 2017 rating upgraded to 'BBB+' from 'BBB'
- USD50m 3.3% senior unsecured notes due 2018 rating upgraded to 'BBB+' from 'BBB'
- USD50m 5.45% senior unsecured notes due 2030 rating upgraded to 'BBB+' from 'BBB'

AVIC International Finance & Investment Limited
- USD1,500m 4.8% senior unsecured notes due 2017 rating upgraded to 'BBB+' from 'BBB'
- USD300m 4.75% senior unsecured notes due 2018 rating upgraded to 'BBB+' from 'BBB'
- USD200m 6% senior unsecured notes due 2023 rating upgraded to 'BBB+' from 'BBB'