Update, March 26, 2:20PM PDT: Bloomberg News moved this piece in which ILFC’s CEO says he’ll get the lessor out from under AIG’s “cloud.”
Mega-lessor International Lease Finance Corp. filed its 2009 10K annual report March 25 with the Securities and Exchange Commission. In it, the company discussed possibilities that could create what’s called a “going concern” situation.
In accounting-speak, the reference is all about bankruptcy. If a company or its auditors raise questions about the ability to continue as a “going concern,” this means there is a possibility the company could seek protection in the US bankruptcy courts. This almost always is a Chapter 11 reorganization filing rather than a Chapter 7 liquidation action.
In ILFC’s case, management raised the going concern issue; its auditors did not (thus, the auditors gave what’s known as a “clean” opinion.) The auditors did make note of the liquidity discussion raised by management, which is noteworthy in itself. But otherwise, the auditor’s opinion was unqualified.
Naturally the media focused on the management discussion of going concern and the liquidity issues facing ILFC. Our phone was very busy with calls from media to add perspective.
We told the Los Angeles Times, for example, that ILFC’s business fundamentals are sound and that the company is well managed and profitable. We said that the entire aviation community knows that ILFC’s troubles are not of its own making, but rather imposed upon it by the troubles at its parent, AIG. (We should have added the the financial community knows this as well, but one thinks of some of these things after the fact.)
We added the analogy that ILFC was an innocent bystander waiting for the stoplight to change when it got mugged by AIG.
Because of the problems at AIG, compounded by the world financial crisis, all the financial issues at ILFC are trickle-down effects from the parent. ILFC is the only unit of AIG that is profitable.
Still, the media focused on the dire language in the ILFC 10K, forcing AIG and ILFC to attempt damage control–largely unsuccessfully. ILFC pointed out that AIG has advanced nearly a billion dollars to ILFC in the first three months (a portion of which was still subject to approval by the Federal Reserve, but this is expected). AIG is committed to providing additional funding as required until ILFC is sold.
(The AIG funds, of course, are flow-through funds from the $173bn bailout by the Fed to AIG.)
We’ve told every media that called that there is no chance, in our view, that the US government will allow ILFC to fail, regardless of the dire language in the 10K.
Naturally the Seattle media focused on the fact that ILFC is Boeing’s largest customer. When the news broke in the US, it was already evening in France, past the print media deadlines, but we have no doubt similar headlines will follow and report that ILFC is the biggest customer for Airbus.
ILFC at December 31 had 168 outstanding orders from Airbus and Boeing, including 74 Boeing 787s and 10 Airbus A380s. The balance of the Airbus orders are for the A320 family; the Boeing mix is mostly 737s with a few 777s as well. ILFC is considered by observers certain to cancel the A380s come January 1, when it is permitted to do so under the contract with Airbus.
ILFC has more than 40 Airbus and Boeing airplanes schedule for delivery this year. ILFC revealed in the 10K that only four of the A320s have been financed by the European Credit Agencies (ECA). Because of credit-rating downgrades, the ECA won’t finance the remaining Airbus’ until certain additional conditions are met. We believe that this will happen; given the European propensity to do what it takes to support Airbus, we would be stunned if the ECAs deny further financings.
The US ExIm Bank, however, did deny ILFC’s application to finance the Boeing deliveries this year, amounting to fewer than a dozen 737s and 777s. This was stunning, given that the ExIm Bank is widely considered to be “Boeing’s bank.” Boeing, ILFC and ExIm met during last week’s ISTAT conference to try and reach an agreement.
The reporting was, for the most part, factually correct, straight-foward write-ups of the 10K. By close of business on the 25th, Google News showed roughly 60 stories and we know of several in the trade press that Google did not pick up. By the morning of the 26th, when European and Asian media are awake, we expect a lot more.
Having said that, The Financial Times of London went over the top. It reported that should ILFC be forced to cancel the 168 orders, valued at $16.7bn, this would be “devasting” to Airbus and Boeing.
Nobody likes to lose $17bn in orders but let’s get real: the two companies have a backlog of around 7,000 jets; 168 equals 2.4%.
Since nobody seriously believes ILFC will be forced into Chapter 11 bankruptcy, what is the real meaning of its current situation?
It is that ILFC has become a microcosm of what is going on in the financial markets. Access to commercial funding is nearly impossible, and when it is available, it is expensive. Here is a business that is profitable, one that is the largest lessor in the world (by asset value), that is reduced to including language about being a going concern, all because of problems out of its own control at its parent that created a worldwide financial crisis and liquidity concerns for a stellar subsidiary. Selling ILFC is problematic because of the financial crisis.
We hate to use the term “poster child” of the world’s financial crisis, but in many respects, that’s what ILFC is.
This is the real perspective about ILFC.
ILFC’s global competitor, GECAS, the mega-lessor subsidiary of GE Capital Services (itself a unit of GE Corp.), has similar issues, even if they are not as dire. (Perhaps we should add “yet.”) Other lessors have found access to capital an issue. All this hurts the airline industry and puts more pressure on Airbus and Boeing to step up and provide customer financing. Airbus says its planning to fund EUR1bn and Boeing figures $1bn. Many observers, including ILFC’s CEO Steve Hazy, figure each company will have to do substantially more than that.
ILFC’s challenges are far from over. But we just do not believe the Fed will allow ILFC to default on its obligations.