AIG's hopes of a quick sale of ILFC are faltering, despite a long list of potential bidders.
After putting ILFC up for sale, it seems unlikely that AIG will find an early resolution in its efforts to sell the lessor and pay back its Federal Bank loan.
The need for a buyer has become more pressing because of AIG's ballooning debt to the government – the Fed recently agreed to provide it with an additional loan of up to $37.8 billion after spending the $85 billion loan facility received in September. Under the terms of the deal, the Fed will borrow $37.8 billion in securities from AIG in return for cash collateral.
Most bankers and lessors believe that AIG would sell ILFC for less than $7.4 billion, but a quick sale is hampered by the fact that no single buyer can raise more than $40 billion in total to refinance the debt. Very few companies – or even countries – can afford this.
A couple of new investors have shown a hunger for a slice of the ILFC cake. US hedge fund Oakhill Capital is believed to be in the market for a $1 billion portfolio and could be interested in buying a tranche. Eton Capital has also emerged as potential buyers after holding talks with ILFC chairman Steven Udvar-Hazy.
Berkshire Hathaway, arguably the world's most successful investment company and a competitor of AIG, has the financial muscle for a bid. In September it agreed to purchase Goldman Sachs's preferred shares valued at $5 billion and has also announced plans to raise a further $5 billion by selling common shares. The proceeds could be used in a bid for part of ILFC.
Warren Buffet, its chief executive officer and largest shareholder, is believed to have looked at ILFC, but one banker says the lessor is not "distressed" enough for Berkshire Hathaway.
"There is also so much to play for with the level of debt and $17 billion-worth of audits," says the banker. "It's like an elephant in the room."
A consortium of investors presents its own problems. "Consortiums have good intentions to start with," says an Irish lessor, "but in practice it is difficult to get the different companies singing from the same hymn sheet."
The lessor thinks that a quick sale and early resolution is unlikely, given the complexities at play. "If ILFC is sold quickly, it will be sold too quickly. If a quick solution is found, the buyer may well look back on the purchase and think why didn't we do things differently – unless, of course, it is sold for a substantial discount."
Speculation has focused on a Middle East buyer coming to AIG's rescue – whether in the form of a sovereign wealth fund or rich lessor, such as Dubai Aerospace Enterprise. Although the Dubai government has committed $10 billion in equity to aviation, it will need this for its orders.
Meanwhile, Abu Dhabi also has a lessor – Waha Leasing – and Qatar Investment Authority is known to want to restrict its aviation investment to Qatar Airways.
The other problem with the Middle East is that liquidity levels in the region are not as deep as many think. The argument that the Middle East is awash with liquidity and will come to the aid of ailing western institutions no longer holds true, says one Irish lessor.
Indeed, what analysts gravely predicted to be a "post-sub prime new world" is fast becoming a reality. A global recession will impact heavily on the Middle East because it is a major energy supplier. The price of oil reached its lowest level this year when it fell to $86.05. Banks and financial institutions in the region are reportedly struggling to secure funding.
After the collapse of Lehman Brothers, Kuwait's Global Investment House recently had to pay a higher interest rate for a $410 million loan. Bourse Dubai, the owner of Dubai's securities exchanges, has been unable to refinance a $3.78 billion loan that matures in February. Gulf Co-operative Countries are also poised to undergo a spate of bank mergers.
Sovereign wealth funds have been key investors in US financial institutions and could be interested in ILFC. The favourite candidate is Saudi Arabia. Saudi Basic Industries – the country's largest public company – which is 70% owned by the government, recently bought GE's plastics division. The country is also looking at creating a sovereign wealth fund.
It is possible that Chinese banks could bid for ILFC, but senior officials at Chinese banks doubt the government would allow them to invest $40 billion overseas. The policy is not to spend so much on acquisitions.
Some bankers have tipped Singapore's Temasek as another possible buyer. Temasek has already made money from aircraft leasing, selling Singapore Aircraft Leasing Enterprise to Bank of China.
Some analysts have speculated that GE Aviation Capital Services (Gecas) will buy ILFC. However, even if the deal made sense commercially – and the amount of risk involved in owning the aircraft would be huge – antitrust regulations in the US and Europe will almost certainly block any deal.
"We do not comment on rumours," says an official spokesman for Gecas.
So the sale of ILFC is no clear-cut affair. The lessor is profitable, regarded as a well-managed company and is one of two market leaders in aircraft leasing. However, its size makes it almost impossible to sell as a single entity. It may be possible to get cash by selling some aircraft, but other lessors are also having trouble raising debt.