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Yesterday, American International Group Inc.’s (AIG - Analyst Report) aircraft leasing wing – International Lease Finance Corp. (ILFC) announced the pricing of unsecured senior notes worth $1.5 billion, equally allocated in two tranches.
Accordingly, one part of three-year senior notes is worth $750 million and is slated to mature on April 1, 2015 carrying a coupon rate of 4.875%. Meanwhile the remaining $750 million of notes are issued for five years, slated to mature on April 1, 2019, and carry a coupon rate of 5.875%. Besides, the settlement for both the set of notes is scheduled to be over on March 19, 2012.
Besides, AIG’s ILFC has appointed Barclays Capital plc (BCS - Snapshot Report), JP Morgan Chase & Co. (JPM - Analyst Report), Credit Suisse AG (CS - Snapshot Report) and Macquaire Securities as the joint book-running managers for the sale. Both the set of unsecured notes carry a rating of “BBB-” and “BB” from Standards & Poor’s (S&P) and Fitch, respectively.
ILFC expects to utilize the proceeds from the senior notes to redeem the senior secured term loan that is scheduled to mature on March 17, 2015. This term loan carries an interest rate of 6.75% with a spread of 475 basis points above the LIBOR rate of 2.0%. The remaining $750 million is projected to be utilized for repayment of debt along with aircraft purchases.
Meanwhile, S&P affirmed the corporate credit rating of “BBB-” for ILFC, which was upgraded by a notch in May last year. Simultaneously, Fitch asserted its junk-level rating on ILFC, with an issuer credit rating of “BB”, while providing a “BBB-” rating of the aircraft leaser’s $3.9 billion senior secured notes and $750 million term loan. All ratings reflect a stable outlook.
Both the ratings agencies are confident about ILFC’s improving capital position and moderate leverage that should be able to meet debt maturities and capital expenditures in 2012. However, these agencies are doubtful about ILFC having a sufficient liquidity to repay its debt maturities in 2013, which already exceeds the projected operating cash flow by $1.0 billion. ILFC requires additional liquid cushion, primarily from AIG, that can mitigate risks from weak performances and the quality of assets.
Meanwhile, AIG had disclosed its intention of instigating an initial public offering (IPO) in September 2011, which is expected sometime this year given the ongoing intensely volatile economic conditions. 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 the market conditions. Nevertheless, an augmented credibility by balancing its cash and debt position along with pulling down its debt-to-capital ratio to below 75% and improving operating cash-to-debt position to about 15% should further impel the ratings agencies to upgrade ILFC’s ratings in future.
Overall, we believe that a strategic action for ILFC will help AIG to accentuate its operating and capital leverage in the long run. Further, divestiture of assets is also crucial for gaining capital flexibility and focusing on its core life and property-casualty business. Earlier this month, AIG also reduced the Treasury’s stake to 70% from 77% until May 2011. However, risks related to the increased debt leverage, several non-recurring charges and other impairment losses are expected to mar the desired upside in the upcoming quarters. Hence, AIG currently carries a Zacks Rank #3, implying a short-term Hold recommendation and a long-term Neutral stance.