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AIG is silent on offer to buy its aircraft leasing unit

AVIATION

The nation's biggest bailout recipient has not responded to Allied Aviation Services' $12-billion-plus offer for International Lease Finance Corp.

January 04, 2010|By W.J. Hennigan

A New York aviation services company has offered to buy International Lease Finance Corp. in Century City for more than $12 billion in a deal that would sever the aircraft leasing firm's ties to the nation's biggest government bailout.

But ILFC parent company American International Group Inc., the insurance giant that received $182.5 billion in bailout money from the federal government, has refused to respond to or even comment on the offer.

"We have support all over the country, but for some reason we can't get a response from AIG," said Robert Rose, president of Allied Aviation Services Inc., one of the nation's largest providers of fuel for commercial aircraft. The offer includes Allied's senior management working for no more than $1 a year until the leasing company's debt is paid off.

Rose said he has written AIG and the Treasury Department looking to discuss a possible deal for more than a year, but he has been "stonewalled."

AIG also has refused requests for comment from The Times.

"From my standpoint, I'd like to see ILFC stay intact," Rose said. "The company is strong. It just needs to be cut loose from AIG. We will clean up the financials and give the company some breathing room."

In an unusual proposal, Allied wouldn't provide any money upfront, Rose said. Instead, Allied wants a three- to five-year government loan to cover the purchase price. During that time, Allied would assume ILFC's debt and restructure the company, he said.

Allied has received the backing of the Teamsters union, which wrote a letter to the Treasury Department saying that Allied's offer provides better job protection than those of private equity firms. ILFC is one of the biggest buyers of Boeing Co. aircraft and therefore plays an important role in preserving aviation jobs, the letter said.

Rose said AIG might be shunning his company because it favors an offer from another potential buyer, Steven Udvar-Hazy, ILFC's chief executive and a co-founder.

In recent months, Udvar-Hazy, 63, has been trying to line up financial partners to buy back some of ILFC's aircraft assets. He sold the company to AIG in 1990 but was asked to stay on to manage it.

Udvar-Hazy has been looking to acquire about 10% of ILFC's aircraft portfolio for roughly $4 billion with backing from a group that includes private equity firms Greenbriar Equity Group and Onex Partners, according to reports. ILFC has about 1,000 aircraft.

Udvar-Hazy, AIG and the private equity firms refused to comment on his proposal.

Udvar-Hazy pioneered the plane-leasing business with ILFC's creation in 1973. His tough-as-nails negotiating skills and his eye for detail helped it become the world's largest aircraft-leasing company, analysts said.

The company's business is similar to automobile leasing. ILFC leases planes to airlines and then sells or re-leases them after a fixed period. Airlines like it because they can get new planes for a lower price.

ILFC buys in bulk and gets the kind of discounts few airlines can get on their own.

Adam Pilarski, senior vice president of aviation research firm Avitas Inc. in Chantilly, Va., said Udvar-Hazy wanted to regain a free hand in running the aircraft-leasing business without the U.S. government.

But losing Udvar-Hazy would be a hard pill for the government to swallow.

"If Steve leaves, where does that leave the business?" Pilarski said. "He's part and parcel to the entire enterprise. Where he goes, management will likely follow. AIG has to be very careful before they sell this business."

Udvar-Hazy isn't AIG's only problem in offloading the company. Currently, there are several aircraft leasing companies up for sale. And in this economic environment, planes are going at fire-sale prices.

"Now's not the time to sell any business, let alone an airplane business," said Jon B. Kutler, founder of Century City private aerospace investment firm Admiralty Partners. "But there is a public outcry to pay back the government, so AIG has a tough decision to make."

ILFC's portfolio now is worth more than $40 billion. And despite the downturn in the commercial airline business, it has remained profitable. But as of Sept. 30, the company had about $30 billion of debt.

In the last year, ILFC has had to tap about $4 billion in federal bailout funds provided to AIG to pay down debt.

In December, Moody's Investors Service dropped ILFC's bond rating four notches because it believed that AIG's support of ILFC had weakened over the long term. According to Moody's, the aircraft unit would have a "diminished strategic importance." Moody's cut the rating to B1 -- junk status -- from Baa3.

Despite the downgrade, Philip Baggaley, senior transportation credit analyst at Standard & Poor's in New York, said ILFC's balance sheet was strong.

"If they can sell portfolios of aircraft to help meet debt maturities, they'll be OK," Baggaley said. "It's just bad timing right now. There are more sellers than buyers out there."

The Royal Bank of Scotland and CIT Group Inc. also are looking to sell their aircraft-leasing companies.

But aircraft values have been dropping, according to Avitas. A 5-year-old Boeing 747-400 is worth about $69 million, Avitas said, down from about $91 million a year earlier.

"It will be several years before the global airline industry is in a healthy state," Baggaley said. "I'm sure that someday AIG wants to sell ILFC in its entirety, but someday isn't likely to be in the near term."

william.hennigan@

latimes.com

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