Copyright 2010 MarketWatch.com Inc.All Rights Reserved
March 9, 2010 Tuesday 7:06 PM EST
SECTION: PERSONAL FINANCE; Banking
LENGTH: 475 words
HEADLINE: AIG’s ILFC unit selling new term loans
BYLINE: Alistair Barr, MarketWatch mailto:ABarr@marketwatch.com.
Alistair Barr is a reporter for MarketWatch in San Francisco.
SAN FRANCISCO (MarketWatch) — American International Group Inc.’s big aircraft-leasing unit took a small first step toward funding itself independently Tuesday.
International Lease Finance Corp., or ILFC, is borrowing $1.3 billion by selling a $750 million five-year term loan and a $550 million six-year term loan. One fixed-income investor said the offerings weren’t complete yet, but were going relatively well.
“It is not surprising that the company is seeing healthy demand for the new loan, given that it is to be secured by assets and will carry an attractive interest rate,” said Kathleen Shanley, a senior analyst at fixed-income research firm Gimme Credit LLC.
“Such a loan will ease the short-term funding pressures on ILFC, but it does nothing to resolve the long-term funding issues,” she added. “To the extent that the loan means ILFC can keep on playing for time, investors may be encouraged to hope that eventually things will all work out somehow.”
ILFC relies on borrowing lots of relatively cheap money to buy planes and profitably lease them at competitive rates. The business benefited from AIG’s support until the insurer nearly collapsed in 2008, and had to be bailed out by the U.S. government.
Since then, ILFC has struggled and AIG (AIG) said recently that it’s exploring “strategic restructuring opportunities” for the business.
AIG has $19 billion of debt maturing in 2010, according to Credit Suisse analyst Thomas Gallagher. That includes $6.8 billion that needs to be repaid or refinanced by ILFC, he wrote in a recent note to investors.
In a recent regulatory filing AIG said that it plans to support ILFC through Feb. 28, 2011, “to the extent that secured financing, aircraft sales and other sources of funds are not sufficient to meet liquidity needs.”
If ILFC can’t fund itself through such efforts, AIG may have to tap the government for money to support the unit.
If ILFC manages to borrow $1.3 billion from private lenders, that may reduce the need for further government support.
Indeed, AIG shares rallied 13% to close at $32.77 on Tuesday on optimism about progress the insurer is making reorganizing itself and repaying taxpayers.
However, Gimme Credit’s Shanley said ILFC’s new term loans won’t solve its problems. The new loans will be secured by ILFC assets, leaving existing unsecured bondholders worse off because their interests will be subordinated.
“Investors have been cheered by the recent announcements of asset sales at AIG, but ILFC’s capital structure remains over-leveraged,” she said. “It remains unclear whether AIG will ever recover any value for its equity stake in ILFC.”
AIG said in its recent annual report that ILFC had an equity value of $8.5 billion, Shanley noted.
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LOAD-DATE: March 10, 2010