ANALYSIS: ILFC sale marks the end of an era

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While it might be overly dramatic to talk about the fall of the mighty, there is one fact – apart from its imminent takeover by a much smaller rival – that says an era has ended for ILFC.

The Los Angeles-based lessor’s growth into an industry giant had been powered by the canny aircraft-trading skills of co-founder Steven Udvar-Hazy and by parent group AIG’s gold-plated AAA credit rating – but today’s ILFC is borrowing at BBB-, the very bottom of Standard & Poor’s investment grade range. Drop a notch, to BB+, and you are into high-yield junk territory.

AerCap’s proposed acquisition of ILFC for $5 billion in cash and shares – and the assumption of $21 billion in debt – is expected to close in the second quarter, and will end some five years of uncertainty over ILFC’s ownership by AIG. The insurance group has been divesting non-core businesses since it was effectively nationalised by the US government following the 2008 financial crisis.

Netherlands-headquartered AerCap – and AIG – are succeeding where a 2013 agreement to sell 90% of ILFC for $4.75 billion to a consortium of Chinese investors failed. The reasons for that deal unravelling remain murky, but ILFC clearly remains a prize acquisition – and that value goes beyond its size.

With more than 1,000 aircraft owned or managed, it is second only to GECAS – another player which has long enjoyed the competitive advantage of the relatively cheap money that comes with a parent company’s investment-grade credit rating – but ILFC is virtually alone among lessors in having ordered the Boeing 787 in volume. Similarly, it was an early mover into Airbus’s A320neo orderbook, and was the first to commit to Embraer’s E-Jet E2 family, being the launch customer of the 97-seat E190 E2.

AerCap on its own is the world’s sixth-biggest lessor by fleet value, but will see that nearly quadruple with the acquisition. The combination will nearly match GECAS, and leave BBAM in a distant third place. Arguably more dramatic is the impact on AerCap’s orderbook. The buyer may have some 311 aircraft in its fleet, but its orders barely register at just a dozen aircraft, compared with some 330 for ILFC.

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AerCap chief executive Aengus Kelly – who will also head the combined company – earlier this year labelled ILFC’s orderbook “the most attractive in the world”.

Although he has avoided going beyond his own position as chief executive to address details of the post-acquisition management structure, Kelly has made clear that much of the value of ILFC lies in the “tremendous” talent within the organisation.

Founded in 1973 by Hazy and the father-son team of Leslie and Louis Gonda, ILFC is credited with creating the operating lease as a mechanism for airlines to manage fleets without carrying billions of dollars of assets on their balance sheets. AIG recognised a winning formula, buying the company in 1990 and keeping Hazy in charge until he retired in 2010 (before returning to the industry to found Air Lease).

After the financial crisis, ILFC hit some turbulence, particularly with respect to the value of its massive fleet. Its most recent financial results, for the third quarter of 2013, showed a net loss of $682 million after the latest in of a series of fleet-value writedowns – in that case $1.1 billion against 36 aircraft, mainly Airbus A340-600s.

ILFC is clearly feeling some pain from what has become a very soft market for second-hand airliners at a time when – as the size of its orderbook indicates – much of its fleet is up for renewal, and its borrowing costs are higher than they were when Hazy built such a formidable money-making machine.

Although rivals might look on and note that times change, none should take too much comfort. Some may have the relative advantage of managing newer fleets, but all are swimming in the same economic waters. AerCap-ILFC, however, will have scale – an undeniable advantage in any finance-based business.

Additional reporting by Laura Mueller