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International Lease Finance Corp (ILFC), the aircraft leasing unit of AIG, is understood to be in the nascent stages of its sale process, dealReporter reports. Sale books for the company have been sent out and first round bids are expected early this month, two sources familiar with the situation said.
On 22 November market reports quoted Steven Udvar-Hazy, ILFC’s founder and CEO, as saying that the leasing unit was in the process of being sold to a consortium of investors that included existing management. Udvar-Hazy was also reported as saying that a deal would be closed by early 1Q09, and the company’s value was roughly USD 10bn.
Udvar-Hazy’s comments were said to be a misrepresentation of the process’ current stage, as it is too early to foretell the value, final bidder, and timing of a deal. Still, both sources familiar said ILFC was considered much more valuable with Udvar-Hazy at its helm. While they noted that he could not afford to take out the company alone, the sources said it was very likely he would run the entity.
Separately, an industry source familiar with the situation said he heard ILFC had been moving very slowly towards a sale and instead was focused on assessing its avenues of credit to figure out how to stabilize the fund for the next quarter.
Debt maturing in 2008 includes approximately USD 4.6bn and USD 4.4bn in bank debt and commercial paper respectively, according to company filings. The company has also stated: “Our borrowing strategy will, over time, result in approximately 15% of our debt, excluding commercial paper, maturing in any one year.”
While neither of the two sources familiar would conjecture on the timing of a deal announcement they did say ILFC was expected to receive bids despite the collapsed credit market. One of the sources said the company’s book value was USD 7.5bn.
Discussing how such a massive deal could be financed in the current market, the first source posited a scenario in which an interested buyer or group of buyers would shore up about USD 6bn of capital, and then consider how to raise another couple of billion dollars in debt to pay for the equity.
A second industry source believed it was possible for a group of private equities to join forces, each contributing roughly USD 1.5bn in equity to realize a deal. Still, he cautioned that potential bidders could consider paying below book value as returns could diminish due to an expected slump in travel.
With an estimated USD 40bn worth of planes, the same source said a deal would have to be structured whereby the already leveraged ILFC would not be too deleveraged, but could still maintain its single A rating - - a challenge that some industry sources described as an impossibility.
The industry source explained ILFC’s business model was predicated upon maintaining its single A rating. However, that rating was a byproduct of the company’s attachment to AIG which had, at one time, enough liquidity to support the leasing business model.
The Federal Reserve has extended AIG a USD 150bn bailout lifeline, and in turn controls roughly 80% of its equity stake.
The second source said he believed ILFC would be highly leveraged because its assets are strong collateral and can be levered extensively. He said a more likely scenario could include asking the government for some lingering support whereby allowing the buyer to maintain ILFC’s single A rating.
If the government has hopes of securing full value for ILFC, it will have to provide some ongoing support, the same source said. Conversely, if the government does not provide aid to buyers, the company is expected to be sold at a lower price.
Discussing why AIG would opt to pursue the sale of ILFC in the bleakest of markets, the second source said it had no choice. He categorized it as a distressed sale, noting that the government is extraordinarily exposed through its investment in AIG and is attempting to raise whatever money it can.
Potential bidders for the company will be few, the sources familiar said, adding that it will be majority, if not totally, dominated by financial sponsors. TPG, KKR, and Carlyle were mentioned as likely bidders, though the second source said the ultimate buyer would likely have to be a consortium.
Berkshire was also mentioned as a prospective bidder, however, both sources said its recapitalization of Goldman Sachs and GE may have tied its hands up for now. Terra Firma – owner of two aircraft leasing companies, namely Pegasus and AWAS – could also show interest in ILFC, but may also have to be a member of a larger consortium, the first source said.
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