Is International Lease Finance too big to fail? Or is it just too large to sell?
Asking the right questions about the airliner leasing company is proving difficult. For while ILFC is very profitable and rivalled in scale only by GECAS-the two are Airbus's and Boeing's biggest customers - it faces an extraordinarily uncertain future.
That uncertainty stems from the global financial crisis. But while ILFC looks sound, its parent is the too-big-to-fail insurance giant AIG, surviving by hundreds of billions of US taxpayer dollars.
CREDIT CRISIS CHAOS
Since the credit crisis started to unravel AIG more than a year ago, ILFC's business model has come under fire. Last year ILFC boss Steven Udvar-Hazy, who set up the company 35 years ago and sold it to AIG in 1990 for $1.3 billion, told Flight International's sister financial news service Commercial Aviation Online that deterioration of AIG's AAA credit rating could force him to seek another owner.
The problem is that AIG's credit rating is ILFC's credit rating. AAA gave ILFC access to funds at rates other lessors could only dream of. As AIG has deteriorated, ILFC's cost of funds has soared.
By late last year, AIG was in government hands and ILFC for sale. Hazy expected a deal in the first quarter of 2009, but while Wall Street insiders know of interested buyers, no deals seem close.
ILFC's 2008 report showed a record year, with pre-tax profit up nearly a fifth to $1.09 billion, and aircraft rental and total revenue up nearly 8% to $4.95 billion and $5.09 billion, respectively.
But Moody's latest downgrade put the senior unsecured rating of ILFC at Baa2 -along way from AAA. As Moody's puts it, ILFC's ratings "have historically been uplifted from its standalone profile due to support from AIG".
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Earlier regulatory filings report interest rates on ILFC debt rose to nearly 8.4% in September 2008 from 3.85% in January 2008. ILFC is now effectively an ordinary leasing company, albeit a big one with nearly 1,000 aircraft.
This year it has 48 aircraft to pay for. It has drawn the maximum $6.5 billion available on its revolving credit facilities, which are to expire from October. AIG has Federal Reserve authorisation to support ILFC's short-term liquidity needs until March 2010, unless ILFC is sold first.
For prospective buyers, the key stumbling block is ILFC's unsecured debt, which has historically been AIG AAA-backed, but would be repriced by holders on change of ownership. A US government guarantee is seen as essential to any sale.
Then there are taxes. ILFC owes $4.3 billion in deferred liabilities and the US government would lose that in a sale. In September, estimates of ILFC's market value ranged from $5-10 billion and would now be less; strip out taxes owed and the US government could realise less than $2 billion for one of AIG's prize assets - basically nothing compared with what tax payers have pumped into AIG.
Or, as David Baxt, the New York-based head of aerospace and defence at investment bank Jefferies, puts it, ILFC is not too big to fail in the sense that the US government fears the impact of its collapse. But the government wants to keep it alive until it can get a proper price for it.
Looking forward, he adds, ILFC enjoys benefits of scale even without AIG. Whether the lessor is bigger than it should be without the artificial stimulus of AIG's former credit rating is unclear, but ILFC will be well-positioned when business recovers as no airline could hope to borrow as cheaply.
But most important, says Baxt, is that even if ILFC had never enjoyed AIG's cheap money, it would have succeeded through Hazy's mastery of the buying and selling of aircraft: "There's no-one smarter than him."
Source: Flight International
