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AIG Plan Division Repays Loan Ahead of Schedule, Now Can Self-Fund

Source: Wall Street Journal

Posted on 23 Aug 2010

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American International Group's airplane-leasing unit, International Lease Finance Corp. (ILFC), announced it has repaid a $3.9 billion loan from the government ahead of schedule.

ILFC announced that the completion of a $4.4 billion sale of debt to institutional investors will likely allow the company to fund itself without assistance from it parent, AIG. Most of the money raised was used to repay a 2009 loan from the Federal Reserve Bank of New York to help ILFC meet obligations at the time.

The transaction represents the single largest repayment of taxpayer money by AIG since its September 2008 bailout. It was a welcome relief for the insurer and its debt-laden ILFC subsidiary, which earlier threatened to become a financial drag on AIG if the unit couldn't raise money on its own to refinance large debts.

Investors' renewed confidence in the world's second-largest aircraft lessor has come amid a broad recovery in the U.S. credit markets and will give the company more flexibility to manage its portfolio of nearly 1,000 aircraft. ILFC's operations have been profitable for much of the past two years, but the company's future had been uncertain because of financing woes and the departures of its co-founder and another top executive.

After AIG's bailout, the insurance giant deemed ILFC a noncore asset and sought buyers for all or parts of the company. It later decided not to sell ILFC because bids were too low, and last year was forced to draw on its credit line from the New York Fed.

AIG has no imminent plans to sell ILFC. And with the unit's funding issues fixed for now, there is a sense that conditions have stabilized and prospects for a sale could improve. At the end of June, ILFC had $31 billion of debt and $8.6 billion in shareholders' equity.

Government-controlled AIG still has to repay more than $90 billion in taxpayer aid before it can exit U.S. ownership and become an independent insurance company again. AIG is counting on the completion of a $15.5 billion sale of a large overseas life insurance business as well as a stock offering of another unit later this year to help repay a chunk of its debts.

The latest $3.9 billion repayment by ILFC helped bring down the outstanding principal balance on AIG's credit facility from the New York Fed to about $15 billion, excluding accumulated interest and fees. The New York Fed and Treasury Department separately own about $75 billion preferred equity in AIG or its subsidiaries.

ILFC last week issued new loans and bonds that come due between 2014 and 2018 and pay annual interest of between 6% and 9%, well above rates that it is used to paying. The average interest rate on ILFC's debt was recently about 5%, up from 4.35% at the end of 2009, and the higher interest expenses will lower its profit margins. The company has a noninvestment-grade, or "junk," credit rating from major ratings firms.

For years, ILFC's business model was based on borrowing cheaply in the short-term credit markets to buy aircraft that it then leased to various airlines for higher rates. The company now has more long-term debt in place, and in the last five months it has raised $12.5 billion. The latest repayment also frees up about $10 billion of aircraft and other assets that were previously pledged as collateral for the now-retired government loan. "This increases our flexibility tremendously," ILFC Chief Financial Officer Fred Cromer said in an interview.

Company Treasurer Pamela Hendry said that while ILFC's average interest rate has been "creeping up," it expects its funding costs to improve as the company takes further steps to raise its credit rating and become financially independent of AIG and the government.

Chief Executive Henri Courpron, an aviation industry veteran who took the top job at ILFC in May, said the recent fund raisings should "quiet the noise in the marketplace earlier this year that ILFC was going to be split up and sold off in pieces."

ILFC, which has shrunk slightly over the past year as it sold off some airplanes, has outstanding orders with Airbus and Boeing Co. for more than $13 billion of jetliners. "We're not in shrinking mode," Mr. Courpron added.