Aug 26, 2010
NEW YORK - As American International Group (AIG)
continues to move through its long restructuring process, its airline leasing business has seen its fortunes shift a few times.
The International Lease Finance Corp. (ILFC)
subsidiary is the largest player in the airline-leasing space by asset value and has a strong book of business. As a result, it was initially considered one of the most sensible assets to sell in order to repay AIG's sizeable government debt.
However, the credit-market freeze that pre-dated AIG's bailout in 2008 bled well into the following year. Potential buyers weren't offering competitive bids - both because they couldn't find financing for an $8 billion business and because the outlook for leasing demand was shaky.
The most high-profile attempt to remove ILFC from AIG's sprawling franchise came when its founder, Steven Udvar-Házy
, tried to form a coalition of financiers to take the company private. It ultimately failed, with Udvar-Házy leaving his CEO role to start up a smaller competitor called Air Lease Corp.
Meanwhile, ILFC's balance sheet condition became increasingly tenuous.
The Los Angeles-based firm held $26.2 billion in outstanding debt at Dec. 31. Collateral constraints were hindering ILFC's ability to purchase new jets and fund operations. With limited access to unsecured debt markets, and passengers still grounded, it was unclear how ILFC would fare.
But within a few months of Udvar-Házy's departure, ILFC had a new management team in place. Since Henri Courpron took over as CEO on May 19, ILFC has restructured nearly $9 billion worth of debt in two separate transactions. It has paid back all of its taxpayer borrowings and freed up $12.5 billion worth of liquidity to fund operations.
The business also appears to be expanding, rather than retrenching, by capitalizing on depressed asset prices to get more bang from its buck. Although ILFC announced a deal to sell 53 planes to Macquarie earlier this year, it followed that up with another deal to add 115 new planes to its fleet between now and 2019.
Demand and profitability for the airline sector has picked up sharply in recent months, indicating better prospects for ILFC as well. ILFC gets its aircraft from Boeing or Airbus, then leases them to airlines across the globe under contracts that can last two-to-three years on the short end, or over a decade under longer-term agreements.
Given ILFC's current position, AIG has decided to retain the business for the foreseeable future.
Fred Cromer, who took over the role of CFO at ILFC in March after serving the same role at ExpressJet (XJT), discussed the recent company's recent debt restructuring and other issues in an interview with Lauren Tara LaCapra from TheStreet on Tuesday. The following is a transcript of the conversation, edited for clarity and conciseness.
Q: ILFC was characterized as one of the crown jewels when AIG first announced its restructuring plan. Then it had some problems with its debt and now it seems like a turnaround story once again. Is that how you see it?
Yes, I think you're right. In AIG's original plan to restructure they were viewing ILFC as a crown jewel. This would be a significant piece of that [divestiture] plan.
Throughout 2009, obviously capital was still very, very constrained. The environment to sell companies was challenging. So, I don't think it was anything related specifically to ILFC having problems because throughout 2009, the underlying business performed quite well. In fact, we had record earnings in 2009. From our point of view, we've been continuing to do the business of ILFC and have been performing pretty well.
Q: For the foreseeable future, ILFC will remain part of AIG?
Yeah, I think AIG will always have optionality on what it decides to do with ILFC. But in terms of our ability to re-access the capital markets - which we did in the springtime of this year - and then in combination with this most recent capital raise, I think it's consistent with what AIG would like to see as a single shareholder of ILFC. Or any other shareholder, for that matter.
Q: How is demand stacking up because of the recession?
In the springtime of this year, as we approached the summer, the statistics year-over-year that are tracked by the aviation trade group started showing dramatic improvements in months.
May, for example, vs. May of last year, June this year vs. June of last year - double-digit increases in expected profitability across all regions. We started seeing improvements in lease rates and re-leasing activity.
We're starting to see pockets of improvement that really make us somewhat optimistic in terms of where we see things going forward. I would say cautiously optimistic because there's still a fragile state of affairs worldwide.
Q: I know ILFC has restructured its debt, but with the ABS market still being frozen up, does that worry you going forward?
The ABS structure is something that ILFC has used in the past to facilitate portfolio sales, [but] securitization has not been a stable of the way ILFC has financed itself. As we think about the securitization market, though, that is a pocket of liquidity that would be available to us, if we chose to use a securitization vehicle.
Q: How would you view the competitive landscape for airplane leasing companies?
There are certainly new entrants. The airline business is pretty cyclical, so as people start to see the recovery, it does attract capital and it does attract new entrants. That's a cycle that we at ILFC have seen before.
It doesn't cause us a huge amount of concern because we have a scale advantage that is very, very difficult for a start-up leasing company to match. It would take them many, many years to get to the size and to have the scale advantage that we have at ILFC.