‘Uncertainty premium’ possible after failure of ILFC sale to the Chinese

Source: Flightglobal.com
This story is sourced from Flightglobal.com

The collapse of the purchase of ILFC by a Chinese consortium could spur a pricing increase on future aviation deals with buyers in the region, according to financiers.

“Following ILFC, the market will likely price in an uncertainty premium on deals with Chinese buyers, considering what happened with the RBS [Royal Bank of Scotland] sale as well,” says the source.

The lessor believes this premium could apply to larger portfolio deals as well as individual aircraft transactions.

A financier agrees, adding: “Even if there is not an meaningful hike in pricing due to the fallout of the two deals with Chinese buyers, there is an obvious message: delays are most likely and the deal could get scrapped. There is a psychological cost.”

Another source indicates his leasing firm is seeing an impact on deal pricing within China. “Whether this is the hangover from ILFC or something more permanent, we will have to wait and see.”

The proposed purchase of ILFC marks the second time the Chinese have tried to enter the leasing market, on a major scale, in the past three years.

RBS Aviation Capital is rumoured to have rejected a $220 million higher bid from China Development Bank for its leasing arm in late 2011 due to concerns about the ability of the state-owned institution to successfully close on the deal. The bank later sold the lessor to Sumitomo Mitsui Financial Group for $7.3 billion in January 2012.

The latest failure also signals to the market that speculation was premature about the anticipated growth of the Chinese in aviation finance on the back of distress stemming from the 2008 financial crisis.

Since day one, ILFC’s sale has raised eyebrows and fuelled doubts, not because the move stemmed from its parent company AIG being effectively nationalised by the US government, but because the proposed buyers were Chinese.

The deal to purchase 90% of the lessor for $4.75 billion, a favourable price according to many market observers, would have given the Chinese instant mass in the operating lease market.

ILFC was founded in 1973 and is often credited with more or less creating the operating lease industry, so the buyers would have acquired invaluable market experience through the lessor’s management team - which is just as crucial as deep pockets for success in aircraft leasing.

The purchase also would have given Chinese airframer Comac a “local” lessor to eventually market its C919 narrowbody.

But, in the end, the naysayers were correct – ILFC did not end up in Chinese hands. AerCap will purchase ILFC for $3 billion in cash and will give AIG a $2 billion minority stake in the Amsterdam-based lessor.

And now, future aviation deals with interested Chinese buyers will most likely face an uphill battle to prevent a similar fate.