American International Group Inc. (AIG) is pondering an initial public offering (IPO) of its aircraft leasing unit, International Lease Finance Corp. (ILFC), in the near future, according to the Wall Street Journal.
Accordingly, AIG intends to raise about $1.5–$2.0 billion through this IPO, which would imply a divestment of about 25% of its stake in ILFC. However, the decision depends on the market conditions. The proceeds from the IPO would once again help AIG shed part of its debt to the US government.
AIG’s aircraft unit has also seen its ups and downs in the last couple of years. ILFC was devoid of any liquidity during the peak of the financial crisis in 2008 when it had drawn the maximum amount of money from the line of credit. However, this unit of AIG finally improved its liquidity position since March 2010 with the markets going into recovery mode. The company attained higher liquidity by extension of its credit facilities, selling off aircraft and issuing new debt through bonds and other debt securities. Through these measures ILFC could ultimately repay about $6 billion in loans.
The enhanced financial leverage further allowed ILFC to raise $2.0 billion in February this year through an unsecured three-year revolving credit line. This division of AIG is seeing a fresh start with new business generation and wishes to rise from its ashes like a phoenix. As of March 31, 2011, ILFC’s book value stood at $8.2 billion. While the unit has entered into 114 lease commitments so far in 2011, ILFC currently owns and manages a fleet portfolio of over 1000 aircraft.
In an effort to repay the bailout money, AIG has been working for the past several quarters to sell its non-core businesses. The financial crisis in 2008 crippled the company’s capital structure, after which AIG disposed of over 35 of its redundant assets. As of April 2011, AIG owes about $53 billion to the government, down from $182.3 billion in 2008.
The company is on its way to reduce the Treasury’s stake of 77%, which was further reduced from 92% when AIG raised $8.7 billion from a stock offering in May this year. Further, the divestiture of assets is also crucial for gaining capital flexibility and focusing on its core life and property-casualty business.
We believe that AIG is poised to accentuate its operating and capital leverage upon dilution of the government stake. However, the risk of execution continues to chase considering the company's credit default swap portfolio and administrative disturbances within AIG. Several non-recurring charges, associated with the intense restructuring, are also expected to mar the desired upside in the upcoming quarters.
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