According to people familiar with the matter, American International Group Inc. (AIG) is looking to sell part of its giant airplane-leasing business through an initial public offering, a potentially large deal that has Wall Street banks pitching for lead roles.
Investment bankers have told AIG that an IPO of the business known as International Lease Finance Corp. could raise $1.5 billion to $2 billion if market conditions are favorable, according to the people. That would represent a sale of roughly 25% of Los Angeles-based ILFC and rank as one of the largest IPOs in the U.S. so far this year.
AIG, fresh off its own stock sale in May, has been assessing strategic options for ILFC, which isn't core to its business of selling insurance and had a book value of $8.2 billion, representing its assets less liabilities, at the end of March. "Management has suggested a willingness to part with ILFC at the right price," analysts from Bank of America Merrill Lynch noted in a research report last month. The insurer has considered selling all or part of the business, according to people familiar with the matter.
An AIG spokesman declined to comment.
The decision on when to sell or list the world's second-largest aircraft-leasing company as measured by fleet size will likely depend on the valuation ILFC can fetch in the stock market and whether an IPO would benefit AIG, which is trying to extricate itself from majority U.S. ownership. An ILFC stock offering could take place as soon as this fall, the people familiar with the matter said.
Proceeds from a sale or IPO of ILFC will go to the U.S. government to help repay taxpayers for the AIG bailout. The Treasury is trying to recoup $11.3 billion from AIG asset dispositions in addition to $41.8 billion from selling its remaining 77% stake in the insurer.
A share sale could capitalize on the recovery in ILFC's bottom line, in line with that of the broader aircraft-leasing sector, which suffered from a credit squeeze during the financial crisis but has bounced back strongly. Most firms have performed well, even as their airline customers struggled, because passenger airplanes generate significant cash flow for paying leases and can fairly easily be removed from carriers that don't pay their bills and then moved to other customers.
Analysts who follow AIG think ILFC's business has growth potential because much of its revenue comes from outside the U.S., and it has many customers in emerging markets like Asia and the Middle East, where air travel is expected to expand in coming years.
ILFC buys airplanes and leases them to commercial airlines all over the world. It uses cash and debt to finance its purchases and makes money largely from the difference between the income from its leases and what it pays on its borrowings.
Financial stocks and the broader market have been volatile in recent months, but there have been short windows of opportunities for IPOs and other deals. In April, Air Lease Corp., a new aircraft-leasing business formed in 2010 and led by industry veteran and former ILFC chief Steven Udvar-Hazy, raised over $900 million in an IPO that drew much investor interest.
AIG Chief Executive Robert Benmosche has previously said the government-controlled insurer would consider an IPO of ILFC if it could fetch good value, but that the company is in no hurry to sell.
Now, AIG executives want to be ready to take ILFC public quickly if the opportunity arises, according to people familiar with the matter. The insurer is likely to pick four investment banks to lead the potential deal, one of the people said, but hasn't held an IPO "bake-off" to formally invite pitches.
Instead, bankers have been offering their ideas and services for ILFC as part of their efforts to maintain relationships with AIG, which itself has more stock sales planned.
Bankers think an IPO of the company is feasible, in part because of the success of Air Lease's April offering, which attracted significant investor interest. Buyers of Air Lease's shares included sovereign wealth funds and other institutional investors that previously hadn't focused on the sector, Mr. Hazy said in a recent interview.
Air Lease ended at $24.59 in 4 p.m. composite trade Monday on the New York Stock Exchange, down 7.2% from its $26.50 IPO price.
Besides Air Lease, there are at least three other aircraft-leasing companies whose shares are publicly traded. If ILFC lists, its market value would make it the largest publicly traded member of the group.
AIG also has recently considered selling ILFC to private-equity firms, but buyout firms might have difficulty securing financing for an $8 billion deal in today's markets, according to people familiar with the matter.
ILFC, founded in 1973, has been a subsidiary of AIG since 1990. Before AIG ran into financial trouble and had to be bailed out by the government, ILFC benefited from the insurer's high investment-grade credit rating and was able to borrow at very low interest rates. When AIG had to be rescued in 2008, ILFC lost access to cheap short-term financing from the public debt markets, and its own credit rating was downgraded to "junk" by major ratings firms after AIG deemed the business a non-core asset.
In 2008 and 2009, AIG talked with potential buyers of ILFC. But it decided bids were too low and opted instead to hold on to the unit and support it financially until market conditions improved.
Last year, ILFC regained access to the debt markets and issued new loans and bonds with maturities that better matched the lifespan of its aircraft assets. After Mr. Hazy left the company in early 2010 following differences with AIG's management and government overseers, ILFC installed a management team led by CEO Henri Courpron, a former aviation investment banker and top Airbus executive.
The company has taken steps to stabilize its finances and streamline its portfolio of over 900 aircraft by selling older planes to make way for newer models. Recently, Standard & Poor's upgraded ILFC's unsecured debt rating from "junk" to a low investment-grade level.
After raising $20 billion in liquidity, signing new aircraft leases and ordering new aircraft from Boeing and Airbus, ILFC is now seen by analysts as able to stand on its own without AIG's backing.
The company, however, is less profitable than it once was because its borrowing costs are higher, its financial disclosures show. It has taken impairment charges in recent quarters after selling older aircraft at losses to make room for new planes.
ILFC swung to a net loss of $383.8 million for 2010, due mainly to impairment charges and higher borrowing costs, from a net profit of $895.6 million in 2009. In the first quarter of 2011, ILFC posted net profit of $73.7 million.