US CREDIT-Long-dated ILFC bonds may lose if Fed support ends

By Karen Brettell

NEW YORK, Oct 28 (Reuters) - Longer-dated debt of
International Lease Financing Corp, the aircraft leasing unit
of American International Group Inc (AIG.N), could be at high
risk of losses because government support linked to AIG may
eventually expire.

AIG, the insurer bailed out by the U.S. government, last
week said it has extended $2 billion in credit to ILFC, which
allowed the company to meet debt obligations due last week. For
details, see [ID:nN19358699].

The loans were made via a revolving credit facility AIG
holds with the New York Federal Reserve Bank and have the same
maturity date as the facility, on Sept. 13, 2013.

"Essentially, the government has reiterated the maturity
date as the end of its involvement and we think investors
should take note," Citigroup analysts John Fenn and Jason Shoup
said in a report.

"For ILFC, going forward it appears the Fed's strategy is
clearly to continue to provide liquidity on a secured basis
until either a resolution can be found for AIG or the 2013
deadline," they said.

Concerns about ILFC increased after efforts by AIG to sell
the company, which had more than $30 billion in debt at the end
of June, proved unsuccessful.

AIG and ILFC Chief Executive Steven Udvar-Hazy have been
holding talks to sell a small part of the unit's portfolio of
commercial aircraft to an investor group led by Udvar-Hazy as a
means of helping with ILFC's liquidity problems.

The cost to insure ILFC's debt with credit default swaps
rose on Wednesday to around 18 percent the sum insured as an
upfront cost, or $1.8 million to insure $10 million for five
years, plus annual payments of $500,000, a price that reflects
high concerns about the unit.

AIG's credit default swaps are trading at an upfront cost
of 10.5 percent, according to Markit Intraday.

ILFC secured the new loans with a portfolio of aircraft,
and also pledged assets against an existing $1.7 billion loan.

Terms of the company's bonds limit ILFC's additional
secured borrowing to around $1.5 billion, which raises doubts
over the company's ability to repay $2 billion in loans that
mature in August 2010, Mark Wasden, analyst at Moody's
Investors Service, said in a report.

"Unless it amends provisions limiting secured debt, ILFC
could be constrained in its ability to obtain additional
secured loans from its parent," he said.

AIG has also indicated it only intends to support ILFC
through August 2010, and extending this support forward would
give greater certainty about ILFC's ability to repay the
maturing loan, Wasden said.

Citigroup analysts, meanwhile, recommend buying five-year
protection on ILFC and funding the position by selling
three-year protection, on the assumption that the government
will continue to support the unit through 2013, but that bonds
are at risk after that date.

Three-year credit default swaps on ILFC closed on Tuesday
at around 13 percent upfront, according to Markit.
(Editing by Leslie Adler)