ILFC Credit Swaps Widen as S&P Says IPO May Cut Rating

(Corrects date of report in second paragraph of story published Sept. 6.)

Credit-default swaps on American International Group Inc. (AIG)’s plane-leasing unit widened after Standard & Poor’s said a public offering of the business may lead to its debt being downgraded one level to junk.

Contracts protecting against the default of International Lease Finance Corp. for five years increased 2.1 percentage points to 7.7 percent upfront as of 12:23 p.m. in New York, according to data provider CMA. S&P said Sept. 2 in a statement that it may reduce ILFC’s credit rating from BBB-, the lowest investment-grade level, as New York-based AIG proceeds with an initial public offering of the business.

AIG Chief Executive Officer Robert Benmosche, 67, is focusing on U.S. life insurance and global property-casualty coverage as he sells assets to repay a government bailout that swelled to $182.3 billion. The insurer said last week that it plans to sell more than 20 percent of the plane lessor and divest most of the unit over time. ILFC’s credit rating is one level higher than it would be as a standalone company, S&P said.

“Under our criteria, we will no longer incorporate that one-notch support as the ILFC IPO process unfolds,” the ratings organization said in the statement.

The upfront payment on ILFC’s swaps is in addition to 5 percent a year, meaning it would cost $770,000 initially and $500,000 annually to protect $10 million of ILFC’s debt.

Outstanding Debt

Outstanding debt dropped by 19 percent to $25.8 billion in the 12 months ended June 30, according to regulatory filings. The Los Angeles-based company sold five-year notes after S&P upgraded its senior unsecured debt rating to investment grade in May at a 5.75 percent yield, 2.88 percentage points less than similar-maturity debt issued last year.

ILFC has been repaying debt and generates a “healthy” cash flow, the ratings firm said, “possibly offsetting our withdrawal of rating credit under our criteria for any potential support from AIG.” Last week’s filing disclosing the IPO plans has no effect on the rating “at this time,” S&P said.

AIG may not be able to complete the IPO in a “timely fashion, or at all, due to market or other conditions,” the company said in a regulatory filing last week. The U.S. Treasury Department, which holds a 77 percent stake in AIG, must approve the sale.

The plane lessor, which relies on debt financing to purchase aircraft, was temporarily shut out of credit markets after AIG’s losses on mortgage bets in 2008 squeezed liquidity at the parent company and led to downgrades.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.