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American International Group Inc.’s ( AIG - Analyst Report ) leading aircraft leasing unit–International Lease Finance Corporation (ILFC) has filed for an initial public offering (IPO), through a SEC filing. Accordingly, subject to certain conditions imposed by the US Securities and Exchange Commission (SEC), ILFC will become a direct subsidiary of ILFC Holdings before the culmination of the IPO.
Citigroup Inc. ( ( C - Analyst Report ) ), JP Morgan Chase & Co. ( ( JPM - Analyst Report ) ) and Morgan Stanley ( ( MS - Analyst Report ) ) are expected to have been appointed as the joint global coordinators for the IPO. However, the timing and pricing of the IPO are awaited.
Although ILFC has signalled the IPO amid intensely volatile economic conditions, market participants believe that the final IPO is not expected before 2012. Currently, the US IPO market is weak given the fragile global macroeconomic conditions, which are also resulting in deferment of the already scheduled IPOs. Hence, given the fundamentally strong position of ILFC, which AIG values to be around $8–$10 billion, we believe that ILFC should wait for an attractive valuation.
Meanwhile, the decision of the IPO has not been an impulsive one. AIG was mulling over divesting about a quarter of its stake in ILFC through an IPO, over the past several months, which would be worth about $1.5–$2 billion.
Moreover, AIG also expects to dispose of at least 80% of its ownership in ILFC within 3 years of the IPO. However, the decision depends on market conditions. Earlier in 2011, ILFC’s rival Air Lease Corp. ( AL - Snapshot Report ) raised $802.5 million in an IPO. The proceeds from the IPO would once again help AIG shed a part of its debt to the US government.
AIG’s aircraft unit has also seen its ups and downs in the last couple of years. ILFC had poor liquidity during the peak of financial crisis in 2008 when it had drawn the maximum amount of loan from the line of credit. However, with the markets recovering, this unit of AIG has been improving its liquidity position since March 2010.
The company attained higher liquidity by extension of its credit facilities, vending off assets and issuance of new debt through bonds and other debt securities. Through these measures ILFC could ultimately repay about $6 billion of loan in 2010.
The enhanced financial leverage further allowed ILFC to raise $2.0 billion, in February this year, through an unsecured three-year revolving credit line. This division of AIG is seeing a fresh lease of life, with new business generation and hopes to rise like the proverbial phoenix. As of March 31, 2011, ILFC’s book value stood at $8.2 billion. While the unit has entered into 240 lease commitments so far in 2011, ILFC currently owns and manages a fleet portfolio of over 1000 aircraft.
On the flip side, in an effort to repay the bailout money, AIG has been working for the past several quarters to sell its non-core businesses. Last month, the company reduced its government loan amount by $2 billion from the proceeds of the sale of its Nan Shan life insurance unit in Taiwan. As a result of this payment, AIG’s outstanding loan has shrunk to about $51 billion from $182.3 billion in 2008.
AIG is on its way to reduce the Treasury’s stake from the current 77%, which was earlier reduced from 92% when AIG raised $8.7 billion from a stock offering in May this year. Further, divestiture of assets is also crucial for gaining capital flexibility and focusing on its core life and property-casualty business.
We believe that AIG is poised to improve its operating and capital leverage upon dilution of the government's stake. However, the risk of execution continues to haunt considering the company's credit default swap portfolio and administrative disturbances within AIG. Alongside, several non-recurring charges, associated with the intense restructuring, are also expected to mar the desired upside in the upcoming quarters.
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