December 19, 2012 / 4:00 PM / 5 years ago

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

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
All opinions expressed are those of Fitch Ratings.
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