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Rating Action:

Moody's affirms ILFC's Ba3 rating on announcement of sale to AerCap, changes outlook to negative

16 Dec 2013

NOTE: On December 24, 2013 the press release was revised as follows: In the first sentence of the first paragraph it should also state that all ratings were affirmed for International Lease Finance Corporation, Flying Fortress Inc., ILFC E-Capital Trust I and ILFC E-Capital Trust II.

New York, December 16, 2013 -- Moody's Investors Service affirmed the Ba3 corporate family rating and all of the ratings of International Lease Finance Corporation (ILFC) and changed the rating outlook to negative. All the ratings for Flying Fortress Inc., ILFC E-Capital Trust I and ILFC E-Capital Trust II were also affirmed. This follows the announcement by ILFC parent American International Group (AIG; Baa1 stable) that it will sell ILFC to AerCap Holdings N.V (unrated) for $3 billion in cash and 97.6 million AerCap common shares, resulting in an estimated transaction value of $5.4 billion based on AerCap's closing share price on December 13, 2013. The ratings and outlook of AIG are unaffected by the ILFC rating action.

RATINGS RATIONALE

ILFC's sale to AerCap provides clarity regarding ILFC's ownership and strategy, both a source of business uncertainty since AIG designated ILFC a non-core holding following the financial crisis of 2008-09. After acquiring ILFC, AerCap will have a leading market presence in commercial aircraft leasing, a valuable order position in new technology aircraft, and opportunities to profitably strengthen ILFC's fleet mix and improve operating efficiency. However, the transaction will expose ILFC's creditors to execution risk associated with AerCap's integration of ILFC's much larger aircraft fleet and transition of key personnel and management systems. In addition, Moody's anticipates that transaction financing will result in far higher leverage than at ILFC and AerCap currently.

Net cash proceeds to AIG at closing, which is expected to occur in the second quarter of 2014, will total $2.4 billion after settlement of intercompany loans. AIG will own 46% of AerCap's common shares at closing; the company has agreed to a share registration agreement that effectively locks up its shares for periods ranging from nine to 15 months.

The transaction will transform AerCap into a market leader in commercial aircraft leasing with a combined fleet of over 1,100 owned aircraft on a pro forma basis, including AerCap's 231 owned aircraft at September 30, 2013 and ILFC's lease fleet of 913 owned aircraft. The acquisition includes ILFC's order book of 338 new aircraft with Boeing, Airbus and Embraer scheduled to deliver the planes through 2022, representing embedded fleet growth that will strengthen the combined entity's position in the newest technology aircraft. Moody's expects that strong demand for the new aircraft will strengthen average portfolio lease yields, enhancing profits and cash flows, assuming that AerCap is able to execute its operating strategies in a way that preserves ILFC's strong customer relationships and marketing capabilities.

The combination will also create opportunities for AerCap to improve upon ILFC's historic performance by reducing operating redundancies, improving fleet mix, and realizing tax efficiencies. AerCap has demonstrated skill in optimizing the return on its own aircraft investments while also reducing overall fleet risk characteristics through selective aircraft sales, a practice the company intends to continue with respect to ILFC's portfolio. Under a section 338(h)(10) election of the Internal Revenue Code, AerCap will step up the tax basis in ILFC's assets, resulting in tax savings and aiding cash flow. The firm plans to recognize additional tax savings by relocating ILFC's US domiciled aircraft to Ireland, which has a lower corporate tax-rate.

A primary credit constraint concerns the size of the transaction, which is unprecedented in the industry, particularly given AerCap's smaller scale compared to ILFC. At September 30, 2013, AerCap's reported total assets of $9.2 billion were one-quarter of ILFC's total of $37.0 billion. Additionally, ILFC's order position of 338 aircraft is eight times the size of AerCap's own orders for 42 aircraft at September 30. AerCap has experience acquiring and integrating aircraft fleets and management systems, but on a smaller scale. The firm owns a partial interest in AerData, developer of an aircraft fleet management system widely used by industry participants and which has served as the platform for prior successful fleet acquisitions by AerCap and others. However, in Moody's view the size of the ILFC integration heightens transition execution risks, including with respect to aircraft relocations to Ireland, access to debt funding to support a larger more complex combined enterprise, and retention of employees critical to achieving operating continuity and platform transitions.

AerCap intends to fund the $3 billion cash payment to AIG with a combination of cash on hand and proceeds from the issuance of senior unsecured bonds. However, the firm's market access as a combined entity is uncertain, given the scale and complexity of the proposed transaction. As a contingency, AerCap has obtained a $2.75 billion unsecured bridge facility from UBS and Citibank that provides a backup source of funding for the AIG payment. AIG will provide a $1 billion five-year unsecured line of credit to AerCap to enhance the firm's liquidity during the transition in ownership. ILFC and AerCap lines of credit are also expected to remain available, subject to lender approvals.

Longer-term concerns with respect to AerCap's market access and liquidity relate to the financing requirements of the combined firm's $25 billion of new aircraft and other equipment on order, deliveries of which ramp up significantly by 2016, as well as to ongoing refinancing needs. The magnitude of AerCap's market funding requirements could become an issue during market contractions that reduce overall appetite for aircraft and aviation finance. Given large recurring funding needs, evolution of AerCap's funding and liquidity profiles will be key rating considerations for ILFC's indebtedness going forward.

Moody's estimates that pro forma leverage (debt-to-equity) of the combined entity will be 5.9x at closing, higher than leverage at both ILFC (3.0x at September 30, 2013) and AerCap (2.6x), reflecting transaction costs and Moody's estimates for new debt issuance and purchase accounting effects. If AerCap is able to capitalize on new revenue and cost saving opportunities, its earnings and cash flow could strengthen, leading to meaningful deleveraging over the intermediate term toward AerCap's target leverage of 3x (net debt basis). But with a large order book and industry demand conditions conducive to growth, Moody's believes that AerCap is likely to operate with leverage at the high end of its target range.

After the sale closes, Moody's currently expects to maintain a negative rating outlook in recognition of the transaction integration risks and higher leverage. During the transition, Moody's will also consider the combined entity's appetite for growth and credit concentrations, its access to funding and its liquidity management as part of monitoring the firm's evolving credit profile. Moody's will also assess credit implications of the transaction accounting in terms of its effects on ILFC's reported financial condition and performance.

Moody's could improve ILFC's ratings and/or outlook if the integration of ILFC and AerCap progresses favorably in terms of operating and financial performance, leverage and liquidity.

Moody's could downgrade ILFC's ratings if its operating prospects weaken, it loses key personnel, or if leverage of the combined entity fails to decline.

International Lease Finance Corporation, headquartered in Los Angeles, California, is the second-largest owner-lessor of commercial aircraft globally.

AerCap Holdings N.V. is a major commercial aircraft leasing company with headquarters in the Netherlands and listed on the New York Stock Exchange (AER).

The principal methodology used in this rating was Finance Company Global Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Issuer rating outlooks changed to negative from stable:

International Lease Finance Corporation

Flying Fortress Inc.

ILFC E-Capital Trust I

ILFC E-Capital Trust II

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms ILFC's Ba3 rating on announcement of sale to AerCap, changes outlook to negative
No Related Data.
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