It's no secret that American International Group has been looking to sell assets in the wake of its financial difficulties. This insurance company yard sale of sorts had outside investors picking up everything from financial units, to Japanese insurance units, to shares of AIA Group through share sales by AIG. But one asset has been harder to unload: International Lease Finance Corp (ILFC), a massive aircraft leasing business AIG bought from Steven Udvar-Hazy in 1990. With parts of the Chinese consortium that was going to acquire ILFC for $4.2 billion now backing out, it's time for investors to once again look at the ILFC situation.
What is ILFC?
ILFC is one of the largest aircraft leasing companies in the world. According to the company's website, ILFC has "nearly 1,000 owned and managed aircraft and a range of innovative customized leasing programs, ILFC's technologically advanced and environmentally efficient aircraft portfolio includes 787s and A350s.". As a wholly owned subsidiary, AIG can exercise control over ILFC and decide what to do with the company.
Why sell ILFC?
Ever since AIG decided to start putting assets up for sale, ILFC was among the top contenders to be sold. Almost every time AIG sold some business unit, analysts pointed out the insurer still had ILFC to sell. However, AIG only received what it deemed lowball offers for ILFC and decided to hold on for a more fair value. Once AIG repaid the last of its government debt, the motivation for selling assets to repay Uncle Sam disappeared, and the insurer was able to consider the ILFC sale on its own terms.
Now that AIG has repaid the Treasury, the focus for selling assets changes from raising funds to repay the government, to right-sizing the insurance group and raising funds for share buybacks. AIG has already completed billions in share buybacks, and the current valuation of AIG shares at 0.7 times tangible book value makes share buybacks more worthwhile.
It should also be noted that another large financial institution sold its aircraft leasing unit in an effort to raise funds following a government bailout. Royal Bank of Scotland Group sold its RBS Aviation Capital Unit to Sumitomo Mitsui Financial Group for $7.3 billion in early 2012. The transaction helped to raise funds for one of the U.K.'s most troubled banks -- one the government has an 81% stake in. But unlike AIG, RBS is still under government control, and the majority ownership stake not only creates a major share overhang but lends further uncertainty to the bank's future.
Should AIG sell ILFC?
Share buybacks are usually given a positive reception on the Street, but when assets are sold to raise the funds, we also need to look at what's being given up. In the case of ILFC, AIG would be giving up a large part of its investment in the aviation industry. However, the aviation industry is positioned well for global growth. The wave of U.S. airline mergers has helped bring stability to the industry, and the demand for travel and commerce in emerging markets will help further fuel the demand for aircraft.
ILFC rival Air Lease is expected to see substantial earnings growth over the next couple of years through a combination of demand and fleet growth. Consensus estimates for Air Lease at Capital IQ show earnings per share rising from $1.70 in 2013 to $2.74 in 2015. Ever since Steven Udvar-Hazy (yes, the same Udvar-Hazy who started ILFC) started Air Lease, the company has been in a growth pattern. While continuing corporate growth is a major factor at work for increasing Air Lease earnings, ILFC could expand as well because of the nature of a larger aviation market.
Without ILFC, AIG would still maintain some exposure to the aviation industry through aviation insurance. But ILFC provides AIG a way to profit more directly from industry growth both domestically and in emerging markets.
Not your father's AIG
Since the financial failings that left AIG on government life support, the insurer has been trying to rebuild itself as a leaner operation. AIG has shed units worldwide while all along wanting to sell ILFC. When a Chinese consortium offered $4.2 billion for ILFC, AIG was more than pleased. However, that deal now faces long odds as major backers have pulled out. If the deal ultimately fails, AIG has several options ahead of it. It could search for another buyer, hold onto ILFC for aviation industry exposure, or run an IPO of the company, as AIG CEO Robert Benmosche has previously mentioned. With all of these options open to AIG, it seems like the company is in a good position to get exactly the price that it wants for ILFC. And if it doesn't get that price, the opportunity available to ILFC in the aircraft market could make the subsidiary a nice profit engine for shareholders if AIG hangs onto it.