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AIG Unit Experiencing Some Turbulence

(AP Photos/Lefteris Pitarakis)
(AP Photos/Lefteris Pitarakis)

“Recent challenges in the global economy” are forcing American International Group to delay the planned spinoff of its International Lease Finance Corp (ILFC) unit, thereby postponing its full return to financial health.

Comments by AIG officials in a securities filing Friday made it clear that ILFC, which requires a huge amount of cash to finance its businesses, will remain a headache for AIG for the foreseeable future.

The comments by Robert Benmosche, AIG president and CEO, and a related filing to the Securities and Exchange Commission made in connection with its second quarter earnings report were the only blot in an obviously good day for AIG.

First, it announced a positive earnings report that indicated its core insurance businesses were growing. Second, it announced that it was repurchasing three million shares of its own stock as part of a Treasury offering of AIG stock through an initial public offering.

Third, it said that it was comfortable with potential federal regulation by the Federal Reserve Board.

And, fourth, in a conference call with analysts that followed the release of its earnings report, Benmosche said, In American International Assurance, its Asian life insurance subsidiary which it has partially spun off, “we have a very good performing company out there.”

And, in a further comment, he lauded Mark Tucker, its CEO, for doing “an outstanding job” running that business. “And so, we're looking for the right time and the right price to monetize our ownership of AIA,” Benmosche said.

AIA has 23 million policyholders in 15 fast-growing countries in Asia, and Tucker, a former professional soccer player who formerly headed Prudential Insurance of the United Kingdom, steered it through an IPO in 2010 which provided AIG with $20.5 billion which it used to help pay back the U.S. government for its investment in AIG. AIG now owns approximately 19+ percent of AIA.

ILFC is another story. AIG has been trying to spin it off through an IPO since filing notice of its plans with the SEC in early September 2011. The plans were updated through an amended filing in June.

Under the amendment plan, ILFC, ILFC Holdings, Inc., an indirect wholly owned subsidiary of AIG, would become a direct wholly-owned subsidiary of ILFC Holdings, Inc. prior to the consummation of the initial public offering. The number of shares to be offered, price range and timing of the proposed offering have not yet been determined, the filing said.

But, Benmosche said Friday, “We're continuing to work to take ILFC public; however, the markets have not been very receptive at this point in time, but we're continuing to manage that business very effectively.”

One of the problems, according to the securities filing, is that ILFC is having difficulty placing aircraft it owned and leased to airlines that have since gone bankrupt.

Another problem is that the number of carriers in arrears on rental payments has doubled over the past year.

In its filing, ILFC cited such recent challenges in the global economy as the European sovereign debt crisis, political uncertainty in the Middle East, and sustained higher fuel prices.

That has increased the “probability that some airlines, including our customers, will cease operations or file for bankruptcy.”

The filing said that during the six months ended June 30, 2012, six customers, including one with two separate operating certificates, have ceased operations or filed for bankruptcy, or its equivalent, and returned 45 of our aircraft.

The filing said that, as of July 27, 2012, 31 of the 45 returned aircraft have been committed to lease, ten aircraft have been or are intended for part-out, one aircraft has been sold and three aircraft are being remarketed for lease.

“Future events, including a prolonged recession, ongoing uncertainty regarding the European sovereign debt crisis, political unrest, continued weak consumer demand, high fuel prices, or restricted availability of credit to the aviation industry, could lead to the weakening or cessation of operations of additional airlines, which in turn would adversely affect our earnings and cash flows in the near term,” the filing said.

At the same time, the filing added, “Despite the current difficulties in the global economy, we are optimistic about the long-term future of air transportation and the growing role that the leasing dustry and ILFC, in particular, will play in commercial air transport.”

 

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