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As ILFC Misses Payment AIG Deal Held Up: What is Next?

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On Friday, American International Group Inc (NYSE:AIG) announced it has not received the 10% of purchase price (around $230 million) due to be escrowed by the buyer of ILFC as of the due date May 30th. AIG has not indicated whether investors should infer from this that the sale is in jeopardy or otherwise. AIG retains the right, based on the purchase agreement, to terminate the deal as a result of the escrow not being received timely.

As ILFC Misses Payment AIG Deal Held Up: What is Next?

Background of AIG ILFC deal

AIG plans to sell 90% of ILFC to an investor group led by New China Trust Co. Ltd. This deal is valued at $5.3bn (67% of ILFC’s book value at the time the deal was announced).  AIG would initially receive $4.23bn for an 80% stake with an option for the investor group to acquire an additional 9.9% stake.  AIG’s net proceeds from the sale are expected to be $3.7bn.  This amount is determined as: $4.23bn of gross proceeds from the sale of 80% of ILFC plus an additional $523mn if the buyers purchase the remaining 10%, less $1.1 billion cash deposit returned to ILFC. On May 10th, the time to close the transaction was extended by one month (to June 14, 2013).  After that date, either the buyer or seller can terminate the transaction if it has not closed. As of May 10th, AIG said it expected the sale of ILFC to be completed in 2Q 2013.

The sale of ILFC was expected to close in 2Q 2013 and AIG would retain a 10% minority interest in ILFC (roughly $40mn of annual earnings).  The sale of ILFC is a strategic positive for AIG, because the aircraft leasing business is non-core and highly leveraged.  In 4Q12, AIG recognized a $4.4bn ($2.97/shr) charge, of which $1.8bn is non-cash, related to the sale and reclassified ILFC as discontinued operations.

What’s Next for AIG?

Many analysts envision one of two scenarios. Either the buyer group submits the deposit for escrow in short order and the deal remains on track for expected mid-June closing. Or, the deal is terminated. In either event, expect an announcement from AIG, likely in the near-term. Based on a brief discussion with management Sterne Agee, they believe AIG has in fact been in contact with the buyer group, but beyond that they do not know in which direction things are headed. Barclays notes “we believe AIG remains committed to the deal.  However, at this point we do not have clarity on whether the consortium of buyers plans to complete the transaction, or whether another factor such as required regulatory approvals could be holding up the deal.”

Implications of AIG IFLC Deal Termination

If the lack of escrow deposit is in fact a precursor to the deal being terminated then a few things come to mind:

AIG would need to begin the sale or IPO process for ILFC anew

Investors and analysts would likely need to rethink near-term capital deployment capacity since many SIFI bulls believe sale proceeds will be used to fund share repurchases in 2H13.

If American International Group Inc (NYSE:AIG) does not sell ILFC for net proceeds of $3.7bn in cash, it could mean share repurchase expectations for AIG is too high.  AIG could repurchase $11bn of stock by YE15 according to Barclays. As a point of reference, each $1bn of share repurchases = ~$0.05/shr annually.

Ratings agencies could move to negative credit outlooks reflecting the uncertainty around a sale or IPO of ILFC, given the leverage impact.

AIG Non-Bank SIFI Designation

Press reports indicate FSOC will meet and formally designate the first wave of non-bank SIFIs on June 4th. Whether it occurs Monday or at a later date, American International Group Inc (NYSE:AIG) will almost certainly be among the first non-bank SIFIs designated. Some believe a designation alone means very little without understanding what the formal rules, stress testing, etc. will be. And without that knowledge, managements (AIG included) may be less likely to repurchase shares given the risk that ultimately the rules prove more onerous than expected.

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