China Inc helps AIG streamline, at a price

December 10, 2012

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bob Benmosche is making AIG more aerodynamic – at a price. The U.S. insurer has agreed to sell its aircraft leasing business to a Chinese-led group for a valuation of $5.3 billion. AIG’s own shareholders will probably forgive their chief executive for the mean headline number and the lack of a clean exit, and focus on the fact that AIG is a step closer to independence from its government shareholder.

Asset manager New China Trust and its co-investors will pay $4.2 billion for an 80.1 percent stake in International Lease Finance Corp, with the option to buy a further 9.9 percent later. While AIG gets stuck with the rest for the time being, it’s a larger lump sum than the group would have been able to pocket had it followed the alternative route of a public listing. Moreover, this is one Chinese purchase the U.S. authorities can presumably be relied on not to block.

That’s just as well, because the price looks low. The consortium values ILFC at just two-thirds of its accounting book value at the end of September. By contrast Royal Bank of Scotland – another forced seller with an impatient government shareholder – sold its leasing business at just over book value to Sumitomo Mitsui in January. Smaller leasing companies like Air Lease Corp and AerCap trade between 70 and 100 percent of book. Worse, AIG will take a $1.8 billion loss from some unused tax credits.

Jettisoning the business makes sense, however. ILFC brought AIG a pre-tax return on assets of just 1.5 percent on average over the past four quarters – even stripping out its frequent write-downs on past-it planes. AerCap, meanwhile, returned over 2 percent in the first half, not including one-off charges.

But the biggest appeal for AIG is that the cash opens up new options. It could use the proceeds to reduce its $16 billion of financial debt outstanding at the end of the third quarter. More significantly, the amount it will receive initially is around half the value of the U.S. Treasury’s remaining stake in AIG – now the last vestige of its 2008 mega-bailout. Even if that stake is not currently for sale, it can’t be long before Benmosche regains his wings.

 

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