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AIG's plane-leasing unit says survival is in doubt without new loans

International Lease Finance has been hampered by the global credit crunch and AIG's troubles. But analysts don't expect the company's 'worst-case scenario' to come true.

March 26, 2009|Peter Pae and Martin Zimmerman

In more potential fallout from the financial woes of insurance giant American International Group Inc., the world's largest aircraft leasing company warned Wednesday that its survival was at risk if it couldn't get additional loans.

International Lease Finance Corp., AIG's Century City subsidiary, said in a regulatory filing that access to financing had been hampered by its parent company's troubles and that without new loans "there could exist doubt concerning our ability to continue as a going concern."

But by Wednesday afternoon, International Lease Finance sought to downplay the message, and most industry analysts said there was no cause for alarm. Either way, airline passengers were not likely to see any effects on their travels.

Experts said they doubted AIG or the U.S. government, which now owns a large chunk of the insurer, would let the subsidiary fail. And in an interview, International Lease Finance's chief financial officer said the company was not in danger of defaulting on its debt obligations.

The company's filing with the Securities and Exchange Commission was meant to detail "a worst-case scenario," said Alan H. Lund, the chief financial officer. "We have the liquidity to satisfy the requirements."

Still, the possibility that the company could have financing problems sent a chill through the aviation industry, which is in the midst of one of the worst travel downturns since the Sept. 11, 2001, terrorist attacks.

The company, known as ILFC, owns 955 passenger jets, and its planes are flown by nearly every major airline. It is the biggest customer of Boeing Co. and Airbus, the world's only two remaining makers of large commercial aircraft. A Boeing spokesman said the company was closely monitoring ILFC's situation.

Steven Udvar-Hazy, who co-founded ILFC with the father-and-son team of Leslie L. Gonda and Louis L. Gonda in 1973, sold the company to AIG in 1990 for $1.3 billion. Udvar-Hazy remained as the company's chief executive.

With a net worth of $2.8 billion, Udvar-Hazy has become one of Southern California's richest citizens -- 147th in Forbes magazine's 2008 ranking of the richest Americans -- and has been a major philanthropist.

If ILFC couldn't get new loans to pay back its debt, airlines and travelers are unlikely to be affected. But "for everybody else, this could be an important bellwether," said Richard Aboulafia, an aviation analyst at Teal Group Corp.

The company would have to have an aircraft "fire sale," which would push down the value of planes and demand for new aircraft, hurting aircraft manufacturers and suppliers, he said.

"I don't think the worst-case scenario is failure but an unpleasant fire sale of planes," Aboulafia said. "They would have to shrink their base to stay alive."

In its filing, ILFC said it was seeking new financing from banks and aircraft manufacturers, which, along with sales of aircraft, would give the company "adequate liquidity to finance and operate our business and repay our obligations for at least the next twelve months."

In addition, the filing said AIG was prepared to meet the leasing unit's short-term funding needs until 2010, or until it could sell the unit.

"AIG and the government is fully committed to its success," AIG spokesman David Monfried said. "It has very strong prospects going forward."

AIG has been trying to unload ILFC and several other units as part of a restructuring plan adopted after the insurer almost collapsed last fall. But buyers have been hard to come by as the turmoil in global credit markets has made it difficult for potential suitors to raise financing. The slump in the airline industry hasn't helped.

Estimates of a possible sale price for ILFC have ranged from $8 billion to $14 billion. Analysts said potential buyers included Udvar-Hazy, who could buy back the company with the help of so-called sovereign wealth funds, which are run by foreign governments.

Meanwhile, AIG's precarious position has made matters worse. Downgrades of AIG's credit ratings have triggered downgrades of its subsidiaries' ratings, making it harder and more expensive for them to borrow money.

ILFC's credit ratings "have historically been uplifted from its stand-alone profile due to support from AIG, which periodically has provided capital to ILFC to maintain its leverage and help it meet its debt repayment and aircraft purchase obligations," Moody's Investors Service wrote last week in a report downgrading the leasing firm's senior unsecured debt to Baa2 from Baa1.

In its annual report, the company reported total debt of $32.5 billion as of Dec. 31. It also reported net income for last year of $703.1 million, up from $604.4 million in 2007. Annual lease revenue rose to $4.9 billion from $4.6 billion. But fourth-quarter profit dropped to $115 million from $175.4 million a year earlier.

ILFC has about 180 employees, most of them working out of its Century City headquarters.

Aviation consultant Scott Hamilton, who follows International Lease Finance, blamed much of the company's woes on its connection to AIG.

"Everybody in the aviation business understands that none of the problems that we're seeing at AIG has anything to do with how ILFC's management has run that business," he said last week. "It continues to be a well-run company."




Broad wings

Number of airlines around the world leasing aircraft from International Lease Finance

Europe: 84

Asia-Pacific region: 41

Middle East, Africa: 19

U.S., Canada: 17

Latin America: 13

Source: Company reports


International Lease Finance Corp.

* Headquarters: Century City

* Owner: American International Group

* Business: Aircraft leasing

* Aircraft owned: 955

* Customers: 174 airlines worldwide, including Alaska, American, Continental, Delta, Southwest and US Airways

* Employees: 180

* 2008 profit: $703.1 million

Source: International Lease Finance Corp.

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