Chinese investors buy 80pc of AIG plane unit for US$4.2b

PUBLISHED : Monday, 10 December, 2012, 10:20am
UPDATED : Monday, 10 December, 2012, 5:56pm

A Chinese group agreed to buy 80.1 per cent of American International Group’s plane-leasing unit for US$4.23 billion in the nation’s largest acquisition of a US company.

The International Lease Finance Corporation acquirers, led by New China Trust Chairman Weng Xianding, have an option to buy another 9.9 per cent, New York-based AIG said today in a statement. The transaction, which values ILFC at US$5.3 billion, passes China Investment Corporations’ US$3 billion purchase of a stake in Blackstone Group in 2007 as the biggest Chinese-US deal.

The acquisition gives the group control of the world’s second-largest aircraft lessor as rising travel in China and Asia spurs demand for planes. AIG, which counts the US government as its largest investor, is selling Los Angeles-based ILFC as Chief Executive Officer Robert Benmosche focuses on insurance operations and works to reduce debt.

“AIG has made a strategic decision to be really an insurance company,” Paul Newsome, an analyst at Sandler O’Neill & Partners, said in an interview before the deal was announced. “Most investors in AIG and potential investors in AIG would like to see AIG be a simpler company.”

AIG will record a US$4.4 billion non-operating loss, which includes a US$1.8 billion non-cash charge tied to tax assets, when the transaction meets criteria for “held for sale” accounting treatment, according to the statement. The deal is subject to approval by US and Chinese regulators.

The group investing in ILFC includes New China Trust, China Aviation Industrial Fund and P3 Investments, AIG said. China Life Insurance and a unit of ICBC International Holdings, the investment banking arm of the world’s biggest bank, may also join once the deal is approved by regulators and the option to buy a further stake is exercised, it said.

ILFC will continue to be run by CEO Henri Courpron and President Frederick S. Cromer, according to the statement. It will remain as a US corporation and be registered with the Securities and Exchange Commission. A new board, which will include Benmosche, will be appointed following the completion of the transaction. The deal is expected to close in the second quarter of next year, AIG said.

A deal would be “credit positive” for both AIG and ILFC, Moody’s Investors Service analysts Mark Wasden and Bruce Ballentine said in a weekly report. “AIG would shed a non-core operation with significant debt, while ILFC would benefit from clarity regarding its future ownership and potentially greater access to clients and funding sources in growing Asian markets.”

ILFC’s new owners will be poised to expand in China and other emerging markets in Asia, Latin America, the Middle East and Eastern Europe, Benmosche, 68, said in a memo to staff. The sale will help AIG narrow its focus on global property-casualty coverage and US life insurance.

“AIG is a different company today than it was four years ago,” Benmosche said in a memo staff. “We’re leaner, more focused.”

ILFC had stockholders’ equity of US$7.9 billion at the end of the third quarter, the company said last month in a filing. The unit employs about 560 people, with more than 450 in the US, where it plans to hire more staff to replace AIG-supported operations, according to today’s statement.

The lessor owns or manages more than 1,000 planes with another 229 on order. It is also the largest aircraft lessor in China, with a 30 per cent market share and more than 175 aircraft leased to 16 airlines in the Greater China region, according to the company. Globally, it trails General Electric’s GE Capital Aviation Services.

“This transaction allows ILFC to continue to serve its worldwide partners in the aviation industry with world-class service while accelerating its growth in important markets, including Asia,” Weng said in the statement.

Weng has been chairman of closely held investment company New China Trust since 2008, according to a biography on the website of Partnership for New York City. Prior to that, he helped set up and then ran the Chinese government’s first professional securities unit, before working for the National Development and Reform Commission and the Chinese securities regulator, it said. In 1993, he was named as founding CEO and chairman of China New Industries Investment.

Cash-rich Asian investors are expanding plane leasing as European banks cut lending amid a regional debt crisis. A group led by Sumitomo Mitsui Financial Group this year bought Royal Bank of Scotland Group’s leasing unit for about US$7.3 billion. Industrial & Commercial Bank of China’s leasing arm signed an order for 50 Airbus SAS A320s in August. Bank of China bought Singapore Aircraft Leasing Enterprise for US$965 million in December 2006.

AIG filed for an initial public offering of ILFC last year, and said as recently as last month that an initial public offering may take place next year. The insurer had considered selling the lessor in 2009 to raise funds to repay a US$182.3 billion US bailout that saved the firm from collapsing amid the financial crisis. The company sold more than US$60 billion in assets, including Asian insurers, a US consumer lender, and its Japanese headquarters, to help repay the rescue.

AIG has gained 47 per cent this year through December 7, compared with a 13 per cent advance for the Standard & Poor’s 500 Index. A sale may boost AIG’s shares and help the insurer reduce debt, Newsome said.

AIG acquired ILFC in 1990 for US$1.16 billion, data compiled by Bloomberg show. Under AIG’s ownership, the plane-leasing unit originally benefited from the ability to borrow money at low rates, an advantage that evaporated when the insurer was hobbled by losses tied to subprime mortgages.

Citigroup, JPMorgan Chase & Company and Morgan Stanley are advising AIG on the transaction, with New York-based Citigroup providing a fairness opinion to the insurer, and Credit Suisse Group is representing the investor group, Jon Diat, an AIG spokesman, said in an e-mail. Debevoise & Plimpton is providing AIG with legal advice, and Simpson Thacher & Bartlett is doing so for the investors.