AIG's Aircraft Leasing Sale Threatened

NEW YORK ( TheStreet) -- American International Group ( AIG) may be forced to consider other options to sell a majority stake of its aircraft leasing subsidiary.

AIG on Friday said in a filing with the Securities and Exchange Commission that it hadn't received a 10% deposit by a May 30 deadline, as required under a December agreement to sell a majority stake in International Lease Financial Corporation (ILFC) to an investor group led by New China Trust.

AIG on Dec. 7 announced a deal to sell up to 90% of ILFC to the investor group, in a deal valuing the aircraft leasing unit at $5.28 billion. New China Trust and its investor partners agreed to purchase a stake of at least 80.1% of ILFC for $4.23 billion. An escrow deposit of 10%, or roughly $20 million, was due on Thursday and not received.

Under the terms of the agreement, AIG has the right to cancel the sale agreement, however, the company has not done so. An AIG spokesman declined to comment.

AIG's shares were down over 2% to $45.19 in afternoon trading.

"Based on our brief discussion with management, we understand AIG has in fact been in contact with the buyer group, but beyond that we do not know in which direction things are headed," wrote Sterne Agee analyst John Nagel in a note to clients on Friday.

During the company's earning conference call on May 3, AIG CEO Robert Benmosche said "the ILFC divestiture continues through the regulatory approval process as expected. Upon closing, the net proceeds that we receive on that transaction will be unencumbered at the holding company," according to a transcript provided by Thomson Reuters.

While discussing possible capital deployment through share buybacks during the call, AIG CFO David Herzog said "the unencumbered proceeds from ILFC... will be available at the holding company for consideration."

Nagel wrote "assuming the buyer makes the escrow deposit and the deal remains on track, today's announcement likely serves as nothing more than a short-term buying opportunity in the stock (all else equal)."

But if AIG decides to look for another way to divest ILFC, which Benmosche calls a "non-core asset," investors may not see the capital return they expect from AIG this year.

"We believe most bulls believe sale proceeds will be used to fund share repurchases in 2H13," Nadel wrote, adding "we still believe this may be a faulty assumption given unknowns around SIFI rules/regs."

"SIFI" stands for systemically important financial institution, which is a designation that requires U.S. financial holding companies to undergo annual Federal Reserve stress tests, while also submitting annual capital deployment plans to the Fed for approval. The Financial Stability Oversight Council is expected to meet on Monday and decide whether or not AIG will be considered an SIFI. That designation seems very likely, considering AIG's massive government bailout beginning in 2008, which was eventually fully repaid, with the government claiming a significant profit.

Nadel has a neutral rating on AIG, with a $46 price target.

AIG Chart AIG data by YCharts

Interested in more on American International Group? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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