TEXT-Fitch: ILFC sale unlikely to shift Asian aircraft leasing market
Dec 19 - There are many unique attributes to American International Group's (AIG) potential sale of its majority stake in leading aircraft lessor International Lease Finance Corp. (ILFC, 'BB/Stable') to a consortium of Chinese investors. While the deal underlines Asia's increasing importance in the global aviation market, Fitch does not believe it will significantly alter the industry landscape in the region. The most recent acquisitions in this sector have involved large Asian banks and smaller private aircraft lessors with newer fleets of 100-250 jets, primarily narrowbodies. These transactions have typically been completed at premiums to book value. By contrast, ILFC has the second-largest fleet in the world with a sizeable component of widebody and older-vintage aircraft. AIG is selling ILFC at a 33% discount to its book equity, despite the sizeable impairment charges taken over the last two years. In our view, these factors make the potential ILFC sale unique and less representative of the general trends in the market. Nonetheless, the Chinese investor community and regulators may become more receptive to additional investment in the aircraft leasing sector if the ILFC investment proves to be successful. Japanese banks have been the most active acquirers so far this year. Sumitomo Mitsui Financial Group acquired RBS Aviation for $1.2 billion in January 2012, and Mitsubishi UFJ purchased Jackson Square Aviation in October for $1.3 billion. Both of these units will likely become subsidiaries and have some level of integration and synergies with the parent. BOC Aviation ('A-/Stable') went through a similar process in 2006. Acquisitions of smaller lessors by larger banks create certain benefits in terms of lower funding costs, consistent single-shareholder strategy, and cross-selling opportunities with the parent. Conversely, lessors that are subsidiaries of larger entities tend to operate with higher balance sheet leverage and may not have the same level of funding diversity as their peers. The combination of airlines' increasing reliance on operating leases globally, along with the expected growth in air travel, make aircraft lessors an attractive acquisition target for financial institutions. Fitch expects to see further consolidation activity in the sector, especially among those lessors that are owned by private-equity sponsors. Particularly rapid growth in demand for leased aircraft among Asian airlines points to further expansion of Asian investor interest in leasing. According to Boeing's latest Current Market Outlook report, the Asia Pacific region is expected to represent 35% of all commercial aircraft deliveries through 2031. We expect changing ownership structures to drive more investment, both through acquisitions and organic growth, as Asian carriers look for new sources of financing to support rapid fleet growth in coming years. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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