UPDATE 4-Sale of AIG plane lease unit to Chinese group at risk

Fri May 31, 2013 1:12pm EDT

By Jessica Toonkel and Ben Berkowitz

May 31 (Reuters) - A Chinese group's purchase of ILFC, one of the world's largest airplane leasing companies, could collapse after insurer American International Group Inc said on Friday it did not receive a scheduled deposit payment.

Under terms of the agreement, the missed payment gives AIG the right to cancel the sale, though such a decision was not expected to be imminent. It is unclear from the agreement whether AIG would be entitled to some sort of break-up fee, and if so, how much.

AIG declined to comment, while a spokesman for the consortium was not immediately available to comment.

Missing a payment on a signed deal is highly unusual. Bankers and attorneys said it underscored the difficulties in dealing with a consortium of investors who may have differing opinions about how deals should get done and how much each party pays. The Chinese government's involvement complicates matters even further.

"Consortiums in general pose concerns," said Morton Pierce, a partner in the mergers and acquisitions department at law firm White & Case. "A foreign consortium adds another element of complexity."

AIG said last December it would sell up to 90 percent of ILFC for up to $4.8 billion. Two weeks ago, the sides agreed to extend the deadline for the deal's closing by a month to mid-June.

The Chinese consortium was to include New China Trust, which is one-fifth owned by Barclays Plc ; China Aviation Industrial Fund; and P3 Investments Ltd. An arm of Industrial and Commercial Bank of China, China's biggest bank, was meant to join the group once the deal had regulatory approval.

But executives at aircraft leasing companies have speculated since the deal was announced last December that it might not close, according to one person who has spoken to a number of the executives over the past few weeks.

"This appeared to be a group of investors who were not household names for the most part and who did not have experience with Western investing," said the person, who wished to remain anonymous because he is not permitted to speak to the media.

OTHER OPTIONS

But another source said the deal was not expected to fall apart, and could still go through. Deals with Chinese buyers were often more complicated due to the government's role in all business transactions, this person added.

"Things take longer and it is not always clear who is making decisions," the person said. "The approval process is not as transparent as it is in the U.S."

Even with the difficulties in getting approval at home, Chinese companies have become more comfortable doing deals in the United States, despite past stumbles.

With over $10.5 billion in deals in the United States so far, 2013 is on pace to be the biggest year for M&A by Chinese companies, according to Thomson Reuters data.

There were $11.5 billion in deals by Chinese companies in the United States in 2012 - a significantly higher figure than in any year other than 2007.

ILFC was the last key asset that AIG was attempting to dispose of following its government-backed restructuring. AIG filed to take the business public in 2011 before ultimately agreeing on the direct sale last year.

"We are disappointed by this news, as the sale was significant to AIG's restructuring. Still, we think ILFC is an attractive franchise and note that AIG may have other options, including an initial public offering," S&P Capital IQ analyst Cathy Seifert said in a note to clients.

With nearly 1,000 owned or managed planes, ILFC is one of the world's largest players in the market for buying aircraft and leasing them to airlines.

But ILFC has been hurt after recording heavy charges in recent years to write down the value of older planes in its fleet. The sale price was about half of what AIG had once insisted the business should be worth.

AIG shares fell 2.4 percent to $45.12 in afternoon trading. The stock has been on a tear, rising 31 percent this year and roughly doubling over the last 18 months.

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