AIG's aviation arm seen luring sovereign funds

By Tim Hepher

PARIS (Reuters) - A forced sale of the aircraft leasing arm of AIG -- the world's second largest -- could attract interest from China or sovereign oil funds, but would probably be beyond the reach of aviation rivals, analysts and aviation executives said on Tuesday.

Shares in American International Group Inc (AIG.N) see-sawed for a second day before closing down 21 percent as the U.S. insurer, once the world's biggest by market value, battled to survive the Wall Street turmoil that brought down investment bank Lehman Brothers LEH.P.

AIG faces a cash crisis after credit downgrades that may force it to raise as much as $20 billion.

The squeeze stirred speculation it may have to make a distressed sale of assets including the profitable International Leasing Finance Corp.

Smarting from high oil prices and credit woes that have grounded half a dozen airlines this year, the industry found itself digesting the stunning prospect that a healthy aviation superpower might be forced into a change of ownership.

Aircraft lessor ILFC, operating in an industry that flies on credit, owns 947 planes worth $55 billion and the word of its CEO and founder, Steven Udvar-Hazy, is seen as law in the design workshops of both Airbus (EAD.PA) and Boeing (BA.N).

The firm he founded in 1973 made a $604 million profit last year and has ridden out most of the boom and bust cycles in a cutthroat industry, but its fortunes are tied to those of AIG.

ILFC could be worth $5 billion to $6 billion based on the valuations of smaller listed lessors like AerCap Holdings (AER.N) and Genesis Lease (GLS.N), Wachovia Capital Markets said in a note to clients.

On peak multiples that could rise to $7 billion to $8 billion.

However, Wachovaia said AIG could have to pay some $3 billion to cancel deferred tax liabilities, reducing the attractiveness of a sale that many in aviation see as a last resort for AIG.

"The universe of potential buyers -- even for a premier franchise -- appears limited as few would be willing to assume the risk of $50 billion in aircraft assets and commitments to buy $18 billion more," Wachovia analyst Gary Liebowitz wrote.

"We do not believe there is sufficient bank lending capacity to support a merger with an existing lessor, Liebowitzsaid.

"The most likely buyers could include private equity funds or sovereign wealth funds," he added, putting a query on China and the Middle East.

Only lessor GE Commercial Aviation Services (GECAS) has a bigger fleet than ILFC, but GE already has significant exposure to aviation through GECAS and its engine and components units.

Both GE (GE.N) and ILFC declined comment.