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AIG Plans to Keep Aircraft Leasing, for Now

ILFC CFO Fred Cromer says AIG's airplane leasing business is likely to remain part of the broader franchise.



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American International Group

(AIG) - Get American International Group Inc. Report

seems likely to retain its aircraft leasing business, which was once considered a key asset to be sold as part of the insurer's restructuring efforts.

When asked whether International Lease Finance Corporation will remain part of AIG for the foreseeable future, ILFC CFO Fred Cromer gave an affirmative answer in an interview with


on Tuesday.

"In AIG's original plan to restructure, they were viewing ILFC as a crown jewel," said Cromer. However, "the new management team decided ... to put a pause on their strategy of significant divestitures and rethink that strategy.

It allowed them to review ILFC and really stop that exploratory process they were in in selling the company."

Several factors have contributed to the apparent change in ILFC's fate.

When AIG was first considering what assets to sell, former CEO Edward Liddy was in charge. Liddy faced criticism for what some characterized as a "fire sale" approach to divesting AIG's assets. Robert Benmosche replaced Liddy roughly a year ago, the new CEO reconsidered everything that was on the chopping block, including ILFC.

Meanwhile, ILFC's ability to refinance debt became a crucial concern for the overall company. ILFC held $26.2 billion in secured financing at Dec. 31, about $4 billion of which came from the

Federal Reserve

through AIG. In two private debt offerings this year, ILFC has successfully restructured its capital system into smaller payments over a longer period of time. It has also freed up about $12.5 billion in liquidity.

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Finally, with the ongoing tightness in the credit markets and banks' regulatory-reform headwinds, there are no guarantee that ILFC could find a viable suitor. Its stated book value is roughly $8 billion, according to Chapdelaine Credit Partners analyst Angelo Graci. He says that with the credit markets still constrained, any offer would come in "significantly lower than that book value."

AIG management's about-face, combined with ILFC's refinancing success and credit-market headwinds, may not be such a bad thing for either entity.

ILFC is able to rely on AIG's much-larger balance sheet for financial support. Meanwhile, Cromer noted that ILFC posted "record earnings" last year, despite its debt-related headwinds. Indeed, pre-tax income rose 24% to $1.36 billion last year, offsetting losses elsewhere in AIG's troubled financial-services division. This year, ILFC's adjusted profits have slumped because it has had to book impairment charges on the sale of 53 aircraft to Macquarie Group, an Australia-based investment bank.

The Los Angeles-based company remains the top airplane leasing business in the world by asset value, just behind

General Electric's

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GE Commercial Aviation Services business in terms of fleet size. But ILFC's fleet, which stood at 1,000 at year-end, stands to grow with the $13.5 billion purchase of 115 new aircraft to be delivered from next year through 2019. The company will have to make good on nearly $250 million of that order next year.

Cromer says leasing demand has increased with the recent pick-up in airline travel. He thinks it will remain strong - with ILFC having announced more than 30 new leasing deals so far this year - but remains cautious due to recent economic stress.

"We're continuing to put the strategy in place to strengthen the balance sheet and really put ILFC in a position to continue to do the business that ILFC has always been famous for in the leasing space," says Cromer.

For AIG's part, whether airplane leasing is ultimately viewed as a "core" insurance asset is yet to be seen. But for the time being, it seems ILFC will remain a part of its sprawling franchise.

"I think AIG will always have optionality on what it decides to do with ILFC," Cromer said. "But in terms of our ability to re-access the capital markets - which we did in the springtime of this year - and then in combination with this

most recent capital raise, I think it's consistent with what AIG would like to see as the single shareholder of ILFC."

--Written by Lauren Tara LaCapra in New York.

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