American International Group, Inc. (NYSE:AIG) seeks to sell almost all of ILFC, the world’s second largest airplane leasing business, to a Chinese association for approximately $4.8 billion. Earlier, Chinese firms exhibited interest in the deal. The aircraft leasing deal will grant the Chinese group access to the worldwide network of 200 airlines in 80 countries. China already leads as the largest market for ILFC.
The Chinese consortium will buy 80.1 percent of ILFC for $4.23 billion and is open to buy another 9.9 percent. The Chinese consortium constitutes of New China trust, which is one-fifth owned by Barclays PLC (LON:BARC) (NYSE:BCS), China Aviation Industrial fund, and P3 investment ltd. The consortium is advised by Credit Suisse. U.S. insurer, American International Group, Inc. (NYSE:AIG) said that it is holding conversation with the Chinese buyers and will submit the offer for review to the U.S. committee on Foreign investment, or CFIUS.
“It’s the biggest deal we have in the aircraft leasing world and it’s very ambitious,” said Paul Sheridan, head of Asia at aviation consultancy firm Ascend Advisor. “We believe there are not enough aircraft on order in China at the moment. It will help Chinese airlines get more aircraft”.
The Chinese state backed investment in some of the sectors have received political criticism, but compared to investment in mineral or telecom equipment, aircraft leasing is seen as less sensitive. “ILFC’s portfolio is not heavily in the U.S. It’s an American-owned asset, but a lot of their aircraft fly outside the U.S,” said Ascend’s Sheridan, adding he did not expect the U.S. government agency to block the deal.
AIG was granted a $182 billion U.S. government bailout from the financial crisis. The firm since then has been selling off its Asian operations. The selling is in consensus with its divestment plans to repay debt. In September, the U.S. treasury brought down its stake in AIG to below 16 percent, from around 53.4 percent.
“Upon completion, the transaction will have a positive impact on AIG`s liquidity and credit profile and will enable us to continue to focus on our core insurance businesses,” AIG CEO Robert Benmosche said in a statement.
ILFC, founded by aircraft leasing legend Steven Udvar-Hazy and sold to American International Group, Inc. (NYSE:AIG) in 1990, will retain its management and continue to be based in Los Angeles. The new board will be appointed, constituting a majority of U.S. and European representatives. ILFC’s total assets of $39.6 billion and $39 million in operating income in the third quarter, compared with an operating loss of $1.3 billion a year earlier.
American International Group, Inc. (NYSE:AIG) has long wanted to sell ILFC, and has been seeking divestment plans, but weak market conditions led to postponement of the plan.
AIG will record a charge of $4.4 billion, including a non-cash charge of $1.8 billion associated with the utilization of tax net operating loss carry forwards from this transaction.
BAML notes in a new report:
The value placed on ILFC in this deal is slightly higher than we had been assuming for valuation purposes. Still, we did not expect AIG to monetize this asset in the near-term. Despite the fact that ILFC’s debt is non-recourse to AIG, we still believe that selling this asset will be a positive event in the eyes of rating agencies.
In addition, when AIG is put through a stress test by regulators, not having the leverage associated with ILFC should take pressure off of AIG’s balance sheet in a stress scenario. While we do not expect AIG to use these proceeds for capital management purposes, should the company sell its stake in AIA the combined liquidity could allow for capital management depending on the view of regulators.