Moody's cuts ILFC to junk, cites falling AIG support

NEW YORK Dec 18 (Reuters) - Moody's Investors Service on Friday cut its ratings on International Lease Finance Corp, the aircraft leasing unit of American International Group (AIG.N), into junk territory, saying it believes AIG's support for the unit has diminished.

"The duration of AIG's support of ILFC is relatively certain through November 2010, given AIG's statements to this effect in its financial filings," Moody's said.

However, "longer-term support from AIG is less certain because of ILFC's diminished strategic importance to AIG," the rating agency said.

AIG responded that it believes in the long-term value of ILFC and continues to pursue strategies to best position the company for the long term. AIG will also support the company's liquidity needs through Nov. 15, 2010, the company said.

Moody's cut ILFC's senior unsecured debt four notches to B1, four steps below investment grade, from Baa3. The outlook is negative, indicating an additional downgrade may be more likely over the next 12 to 18 months.

AIG, which has been propped up by around $180 billion in government funds, has been seeking to sell ILFC, but has struggled to find buyers due to the aircraft leasing company's high debt load of around $30 billion.

"We think AIG's support mitigates potentially more severe near-term illiquidity at ILFC while the firm tackles coming debt maturities," Moody's said. "ILFC needs to transition to funding that is better matched to its asset profile, and it will need AIG's support to accomplish this."

ILFC's funding strategy, in which it relied on issuing cheap debt to fund its aircraft leases, ran aground as credit markets seized up and AIG lost its high ratings.

"The firm is currently unable to economically issue unsecured debt, traditionally the backbone of its funding, in volumes sufficient to refinance maturating debt," Moody's said.

ILFC is likely to pursue liquidity actions over the next several quarters, including issuing secured debt and selling some assets and that these actions will reduce the company's financial and operational flexibility, Moody's said.

The company will also likely record losses as it sells aircraft assets to generate cash to repay debt, in lieu of injections from AIG, Moody's said. (Reporting by Karen Brettell; Editing by Chizu Nomiyama)