(AIG) American International Group ILFC to Raise $650 Million from Notes

Yesterday, American International Group Inc.’s (AIG) aircraft leasing unit – International Lease Finance Corporation (ILFC) – announced the issue of long term notes worth $650 million.

Accordingly, the unsecured notes of $650 million are issued at an initial price of $100.00 and are scheduled to mature on January 15, 2022.  The non-callable notes are projected to have a coupon rate of 8.625%, while the spread stands at 681.5 basis points (bps). Besides, the settlement is scheduled to be over on December 22, 2011.

Rating agencies Moody’s Investors Service of Moody’s Corp. (MCO) and Standards & Poors’ (S&P) have rated the notes “B1” and “BBB-”, respectively.

Further, AIG’s ILFC appointedCitigroup Global Markets Inc. of Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Bank of American Merrill Lynch of Bank of America Corp. (BAC), RBC Capital Markets, JP Morgan Chase & Co. (JPM), Deutsche Bank Securities Inc. of Deutsche Bank AG (DB), Barclays Capital of Barclays plc (BCS) and UBS Securities LLC of UBS AG (UBS) the joint book-running managers for the sale.

Meanwhile, ILFC projects to raise $641.6 million post accounting for underwriting discounts, fees and other expenses. AIG’s ILFC expects to use these net proceeds from the notes offering to repay some of its debt and to execute on the pending aircraft purchases along with other business operations.

Prior Financing Initiatives

In April this year, ILFC had refinanced its debt by securing a $1.3 billion term loan, which would be funded over the next 12 months and is set to mature in 2018. In addition, its proceeds were to be used to prepay ILFC’s existing unsecured and secured bank facilities due in October 2011 and 2012. Besides, ILFC has also secured the right to increase its term loan commitment by $200 million from additional lenders.

Earlier this year, ILFC had raised $2 billion through an unsecured three-year revolving credit line and also agreed to a public offering of $1 billion in senior notes due 2020. Moreover in 2010, AIG’s unit ILFC raised more than $14 billion through various funding sources and other liquidity initiatives. This step was taken to pay down the burden of AIG that received financial support from the federal government at the time of the financial crisis.

Our Take

Over the last couple of years, ILFC has been under severe debt and underperformed assets. As a result, AIG’s unit also posted a loss of $1.3 billion during the third quarter of 2011, primarily due to a $1.5 billion impairment charge on its older, less-fuel-efficient aircrafts. Impairment losses are further expected to dampen full year results of 2011.

Meanwhile, AIG also disclosed its intention of instigating an initial public offering (IPO) in September this year, which is not expected before 2012 given the ongoing intensely volatile economic conditions. Moreover, AIG also expects to dispose of at least 80% of its ownership in ILFC within 3 years of the IPO. However, the decision depends on the market conditions.

Given the underperformance, last month Fitch Ratings asserted its junk-level rating on ILFC, with an issuer credit rating of “BB”. However, the outlook remains stable, which reflects ILFC’s long-term strategy of minimizing its fleet portfolio by eliminating older aircrafts, while building a separate strong liquidity profile.

Overall, we believe that a strategic action for ILFC will help AIG to accentuate its operating and capital leverage in the long run. Further, divestiture of assets is also crucial for gaining capital flexibility and focusing on its core life and property-casualty business.

So far, AIG has also been able to reduce the Treasury’s stake to 77% from 92% until April this year. However, risks related to the increased debt leverage, several non-recurring charges and other impairment losses are expected to mar the desired upside in the upcoming quarters. Hence, AIG currently carries a Zacks Rank #3, implying a short-term Hold recommendation.

AMER INTL GRP (AIG): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

BARCLAY PLC-ADR (BCS): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

DEUTSCHE BK AG (DB): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

UBS AG (UBS): Free Stock Analysis Report

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