US CREDIT-ILFC credit concerns jump as US abandons CIT

By Karen Brettell

NEW YORK, July 17 (Reuters) - Credit concerns about
aircraft leasing company International Lease Finance Corp have
risen after CIT Group (CIT.N) failed to win additional
government support, though analysts say the AIG unit is more
likely than CIT to get government backing if needed.

CIT, which mostly lends to small and medium sized
businesses but also has transportation finance businesses, said
late on Wednesday that rescue talks with the government had
collapsed, sparking concerns the government may be raising the
bar on which companies it will support.

Concerns over ILFC have increased as its parent, troubled
insurer American International Group (AIG.N), has so far failed
to sell the unit. The sale is challenging as ILFC needs to
refinance around $6 billion in debt maturing this year,
including $2 billion coming due in October.

Some analysts have said that the government may need to
guarantee this debt in order to complete a sale.

The upfront cost to insure ILFC's debt with credit default
swaps has jumped by around 4 percentage points since CIT
announced the government would not support the firm, to 23
percent, or $2.3 million to insure $10 million for five years,
plus annual payments of $500,000, according to Markit
Intraday.

"ILFC spread weakness is definitely in sympathy with CIT's
misfortunes," said David Havens, a managing director in credit
trading at Hexagon Securities in New York.

"I believe that there is a strong case to be made for
supporting ILFC," Havens said. "That said, lines have hardened
in D.C., and if a 'Main Street' company like CIT doesn't get
saved, then why save ILFC?"

ILFC is viewed as important to the airplane manufacturing
business as it is one of the biggest customers of Boeing Co
(BA.N) and Airbus (EAD.PA).

"There's nothing wrong with this company, it's got a large
fleet of airplanes, they're all leased out, there's a lot of
cash flow," said Roger King, analyst at credit research firm
CreditSights.

And, the government "needs to extract some value out of
AIG," he said.

The company's business model, however, relies on it having
access to cheap funding, which is no longer the case.

ILFC's 4.875 percent bond due 2010 fell almost two cents on
the dollar on Friday to 86.375 cents, yielding 19 percent,
according to MarketAxess.

"That's one of the reasons ILFC joined AIG, because with
the AAA ratings they could get their cost of capital way down,"
said King. "They need a highly rated buyer or the government
has to give them some support, like a guarantee."

ILFC had total debt financing and subordinated debt of
about $32 billion as of March 31.
(Editing by Andrea Ricci)