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American International Group Inc. (AIG - Analyst Report) confirmed the sale of about 90% of its aircraft leasing unit – International Lease Finance Corporation (ILFC) – to a group of Chinese investors. The deal is valued at $5.28 billion.

Accordingly, AIG has agreed to vend 80.1% of ILFC for $4.23 billion to a Chinese investor group, including New China Trust Co. Ltd., China Aviation Industrial Fund and P3 Investments Ltd. Further, the company has granted an opportunity to these investors to buy another 9.9% in ILFC. Meanwhile, the deal is also expected to add New China Life Insurance Co. Ltd. and an investment arm of ICBC International to the Chinese investor consortium. Subsequently, AIG will retain the remaining 10% stake in ILFC.

The Chinese investor group has appointed Credit Suisse AG (CS - Snapshot Report) as the financial advisor, while Simpson Thacher & Bartlett is the legal advisor. AIG, on its part, has appointed Citigroup Inc. (C - Analyst Report), JP Morgan Chase & Co. (JPM - Analyst Report) and Morgan Stanley (MS - Analyst Report) as the joint-managers of the sale, while Debevoise & Plimpton LLP has been assigned as the legal advisor.

Additionally, AIG expects to record a non-operating loss of about $4.4 billion on the sale of this non-core asset upon the successful culmination of the transaction, which is expected by the second quarter of 2013, subject to regulatory approvals in the US and China. This non-operating loss includes a $1.8 billion worth of non-cash charge related to the tax utilization of net operating loss carryforwards from the deal.

Los Angeles-based ILFC has long been the feather in AIG’s cap, functioning with shareholders’ equity worth $7.9 billion at the end of September 2012. Armed with a global customer base of approximately 200 airlines, this non-core unit of AIG operates in 80 countries through 560 employees.

Moreover, ILFC has a strong business portfolio of over 1,000 owned or managed aircraft. The firm also has deals to procure 229 new high-demand, fuel-efficient aircrafts as well as rights to buy an additional 50 such aircrafts.

According to Bloomberg, AIG had bought ILFC for $1.16 billion in 1990. However, the company had put the unit on sale since 2009 given to repay the $182.3 billion US government bailout loan taken in September 2008. AIG was also mulling over the initial public offering (IPO) of ILFC for over a year.

AIG will stand to gain from sale of this well-performing operating unit. The sale complements the company’s strategy to focus on its core-insurance operations, raise funds to repay the government bailout loan to liberate itself from the remaining 15.9% stake of the US Treasury, as well as replenish its capital base. On the other hand, the rising demand for aircraft in China and Asia supports for the purchase decision of the Chinese syndicate.

We believe that the deal will be favorable for AIG, the Chinese consortium and ILFC, since each of these will now be able to clearly analyze their respective future operations. While AIG will now have a sturdy but lean-sized business, the deal will also fuel the progression of ILFC in the potentially growing Asian markets, while firming its position in the global aviation markets.

AIG has been vigorously streamlining its core operations. At the time the sale of ILFC has been decided, the company has been strengthening its core-insurance operation with the recent acquisition of Hartford Financial Services Group Inc.’s (HIG - Analyst Report) Woodbury Financial Services Inc. AIG also entered into a joint venture (JV) with PICC Life Insurance Co. Ltd. (PICC Life) in collaboration with The People’s Insurance Co. of China Ltd. (PICC Group) to expand in the second largest global economy of China.

Currently, AIG carries a Zacks Rank #3, which implies a short-term Hold rating although the long-term recommendation remains Neutral.

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