NEW YORK—(BUSINESS WIRE)—Fitch Ratings has affirmed the following ratings:

—SMBC Aviation Capital Limited’s (SMBC AC) Long-Term Issuer Default Rating (IDR) at ‘BBB+’;

—SMBC Aviation Capital Finance DAC’s Long-Term IDR at ‘BBB+’; —SMBC Aviation Capital Finance DAC’s senior unsecured notes rating at ‘BBB+’.

The Rating Outlook has been maintained at Negative.

A full list of rating actions follows at the end of this press release.

These actions are being taken in conjunction with a broader aircraft leasing industry peer review conducted today by Fitch, which includes five publicly rated firms. For more commentary on the broader sector review, please see ‘Fitch Completes Aircraft Lessor Peer Review’, available at ‘www.fitchratings.com’.

KEY RATING DRIVERS – IDRs and Unsecured Debt

The rating affirmations reflect the continued institutional support linkage between SMBC AC and its majority owner, Sumitomo Mitsui Financial Group, Inc. (SMFG), combined with SMBC AC’s well-established aircraft leasing franchise and track record, experienced management team and strong fleet/lessee dynamics, offset by its concentrated funding profile and its elevated balance sheet leverage.

The maintenance of the Negative Rating Outlook for SMBC AC is aligned with the Negative Rating Outlook assigned to SMFG (due to institutional support linkages), which in turn is aligned with the Negative Rating Outlook assigned to Japan (due to sovereign support linkages). The Negative Outlook with respect to SMBC AC does not reflect any changes in Fitch’s views of SMBC AC’s standalone risk profile or the strategic importance of SMBC AC to SMFG.

Though presently representing only a small portion of SMFG’s total assets, SMBC AC is viewed by Fitch as strategically important to SMFG and SMBC, given SMBC AC’s fit with the broader company’s strategic objective to diversify its business mix and invest outside Japan in activities with different risk/return profiles 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 as defined under the agency’s ‘Global Non-Bank Financial Institutions Rating Criteria’, which typically results in a rating of one to two notches from 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 has a limited operating history under SMFG, is small in size relative to the broader organization, operates in a different jurisdiction and is not fully-owned by SMFG.

SMBC Aviation Capital Finance DAC’s IDR and Outlook are equalized with SMBC AC’s IDR and Outlook and reflects the full and unconditional guarantee of SMBC Aviation Capital Finance DAC’s obligations by SMBC AC. The senior unsecured notes’ rating is equalized with SMBC AC’s Long-Term IDR, reflecting Fitch’s expectation for average recovery prospects given that the majority of SMBC AC’s consolidated debt-funding is unsecured. As of March 31, 2016, secured debt represented 4.5% of total debt and 3.2% of total assets. Pro forma for the notes offering, secured debt represents 4.2% of total debt and 3.1% of total assets.

In terms of SMBC AC’s standalone credit profile, SMBC AC (and its predecessor organization prior to acquisition by SMFG) has built a well-established aircraft leasing franchise over the last 15 years, profitable in every year of operation (excluding the effect of one-off breakage costs in relation to acquisition refinancing in fiscal year 2013) with limited asset impairment charges and stable lease rates. The company has an experienced management team, an institutional structure capable of supporting a large aircraft fleet, and a customer base well-diversified by both operator type and geography, with a number of relatively strong airline credits comprising the top exposures. Exposure to GOL Linhas Aereas Inteligentes S.A. (Fitch IDR of ‘RD’), which represented 3.0% of net book value as of March 31, 2016, is of moderate concern.

Fitch considers the quality of the aircraft fleet a significant strength, as it is largely unencumbered and predominantly comprised of young, in demand and fuel-efficient narrowbody models of the Airbus A320 and Boeing 737 families, with more on order. The company has demonstrated the ability and discipline to execute aircraft sales successfully through various market environments, which Fitch views positively.

These standalone strengths are counterbalanced by SMBC AC’s concentrated funding profile and its elevated balance sheet leverage. Third-party funding represented 39.3% of SMBC AC’s total debt funding as of March 31, 2016 and is 43.3% pro forma for the unsecured notes offering. Leverage, defined as debt-to-tangible equity, on a consolidated basis was 4.7x at March 31, 2016 and is 5.1x pro forma for the unsecured notes offering. This pro forma level is among the highest leverage of Fitch-rated aircraft lessors. Fitch expects some reduction in SMBC AC’s balance sheet leverage over the next three years, although it is likely to remain higher than most peers.

Japan’s Long-Term Foreign- and Local-Currency IDRs of ‘A’ were affirmed on June 13, 2016 and the Outlook was revised to Negative. Fitch subsequently affirmed SMFG’s Long-Term Foreign- and Local-Currency IDRs at ‘A’ and revised the Outlook to Negative and affirmed SMBC AC’s Long-Term IDR at ‘BBB+’ and revised the Outlook to Negative.

The Negative Outlooks on Japan’s IDRs followed the Japanese government’s announcement on June 1, 2016 that it had decided to delay a scheduled increase in the consumption tax from April 2017 until October 2019 (having already delayed the hike from the original date of October 2015), and did not identify any specific offsetting measures. The Outlook revision primarily reflected Fitch’s decreased confidence in the Japanese authorities’ commitment to fiscal consolidation. The consumption tax increase was an important element in the government’s fiscal consolidation strategy, which aims to bring the primary deficit of the general account of the central and local governments into balance by the fiscal year from April 2020 to March 2021 (FY20), against a 3.3% deficit in FY15.

The Negative Outlook on the Long-Term IDRs of SMFG and its core banking subsidiary, Sumitomo Mitsui Banking Corporation (SMBC) stems from Fitch’s view that these entities’ Viability Ratings (VRs) are now effectively constrained by the Japan sovereign rating. SMFG and SMBC’s high exposure to Japanese government bonds, despite reductions in the past few years, makes them unlikely to avoid failure in the event of a sovereign default even though their intrinsic profiles otherwise remain broadly stable. For more information, see Fitch’s rating action commentary ‘Fitch Affirms Japan at ’A’; Outlook Revised to Negative’ dated June 13, 2016 and ‘Fitch Revises Outlook for Japanese Financial Institutions to Negative’ dated June 16, 2016.

RATING SENSITIVITIES IDRs and Unsecured Debt

SMBC AC and SMBC Aviation Capital Finance DAC’s IDRs and SMBC Aviation Capital Finance DAC’s unsecured note rating and Outlook are equalized with SMFG’s Long-Term IDRs and Outlook. As such, the ratings are primarily sensitive to changes in SMFG’s ratings and outlook, given that the ratings of SMBC AC and SMBC Aviation Capital Finance DAC are notched two notches below those of SMFG. In addition, the rating of the unsecured notes is sensitive to changes in Fitch’s assessment of the recovery prospects for the notes such that an increase in the amount of secured funding which materially impacts unencumbered asset coverage of unsecured debt could result in the unsecured note rating being notched down from SMBC AC’s IDR.

Although not expected by Fitch, SMBC AC’s IDR could be adversely affected should SMFG seek to dispose of its investment in SMBC AC or should there be any other developments within SMFG that are perceived by Fitch to alter SMFG’s willingness or ability to provide support to SMBC AC. 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 affected Fitch’s assessment of the propensity of SMFG to provide support to SMBC AC in case of need.

Absent upward movement of 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.

Fitch has affirmed the following ratings:

SMBC Aviation Capital Limited

—Long-Term IDR at ‘BBB+’.

SMBC Aviation Capital Finance DAC

—Long-Term IDR at ‘BBB+’;

—Senior unsecured notes at ‘BBB+’.

The Rating Outlook is Negative.

SMBC AC is a leading global aircraft lessor, established in 2001 and rebranded as SMBC AC in 2012 on its acquisition by a consortium of SMFG and Sumitomo Corporation companies. As of June 2016, the company owned and managed 446 aircraft valued at over $15 billion, on lease to airline customers in over 40 countries, with commitments to purchase a further 205 aircraft worth over $23 billion from Airbus and Boeing in the coming years.

Date of Relevant Committee: July 25, 2016

Summary of Financial Statement Adjustments: Fitch has made no adjustments that are not disclosed within the company’s financial statements.

Additional information is available at ‘www.fitchratings.com’.

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884128

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