Featured September 12, 2011

Managing Director Greg Presson comments on IPOs

IPO by Jet Lessor May Give Lift to L.A.’s Public Profile

By HOWARD FINE, Los Angeles Business Journal


After years of losing major public companies, Los Angeles is finally about to gain one – thanks to the recent financial crisis. What’s more, the company is already here.

International Lease Finance Corp., a Century City aircraft leasing giant that Hungarian immigrant Steven Udvar-Hazy built from scratch and sold to American International Group Inc. in 1990, is poised for an initial public offering that should vault it into the top 10 of L.A.’s public companies.

“This is refreshing news for the local business community,” said Greg Presson, senior managing director for B. Riley & Co. LLC in West Los Angeles. “There’s been lots of gloom and noteworthy exits of local publicly traded companies, so this is a welcome psychological boost.”

ILFC is the largest aircraft leasing company in the world behind General Electric Corp.’s G.E. Capital Aviation Services. It has roughly 200 employees in its headquarters at the former MGM Tower in Century City.

While ILFC’s planned initial public offering might not alter the company’s physical presence in Los Angeles, the IPO and subsequent public offerings would shake up L.A.’s roster of publicly traded companies.

ILFC would have a market valuation of between $8 billion and $10 billion, according to an estimate reported in the Wall Street Journal. A company of that value today would rank No. 9 or No. 10 on the LABJ Stock Index – behind companies such as Occidental Petroleum Corp. and Walt Disney Co., but ahead of Herbalife Ltd. and Jacobs Engineering Group Inc.

“This is a significant contributor in terms of market cap and prominence,” Presson said.

Unlike many IPOs, however, this one is not about raising growth capital. Rather, the proceeds will go to AIG to help pay back the U.S. government for its massive $170 billion bailout of the insurance giant three years ago.

If the IPO goes forward later this year – and that’s by no means certain with the highly volatile equity markets – AIG would spin off ILFC into a newly formed holding company. Then 20 percent of ILFC’s shares would be released for sale in the public offering, either at the end of this year or early next year. AIG would sell off its remaining shares over the next three years, according to terms of the IPO outlined in a Sept. 1 filing with the U.S. Securities and Exchange Commission.

Once the spinoff is complete, International Lease Finance would no longer be subject to the restrictions on executive pay that came with the government bailout – restrictions that have hurt the company amid increasing competition in the aircraft-leasing business, which has seen several companies start up around the globe.

Just a block away from ILFC’s offices are the headquarters of rival Air Lease Corp. Udvar-Hazy, reportedly chafing under executive compensation restrictions – the government capped the salaries of executives of bailed-out companies – left with several other executives to form Air Lease in February of last year. That company, located at 2000 Avenue of the Stars, completed a $900 million initial public offering in April.

Jack Keady, an aviation consultant in Playa del Rey, said ILFC will have to show that it can compete out from under AIG’s umbrella. ILFC is now led by Henri Courpron, a former executive at Blagnac, France’s Airbus S.A.S.

“In the old days, with AIG’s deep pockets, people knew that ILFC was backed up by someone big,” said Keady. “Now, when they are on their own, they have to generate some nice-looking deals right out of the starting gate to signal that this is a newly freed up powerhouse.”

An ILFC spokesman declined comment, citing an SEC-mandated quiet period after the release of its regulatory filing.

Leasing pioneer

Udvar-Hazy founded ILFC in 1973 as one of the first major aircraft leasing companies. It buys airplanes and leases them to commercial airlines. Airlines generally prefer to lease planes as it doesn’t tie up as much money and gives airlines flexibility to expand or shrink their fleets.

With deregulation of the airline industry following in the late 1970s, the business grew.

In 1990, as competition in the aircraft leasing industry began to heat up, Udvar-Hazy sold ILFC to AIG for a stock swap worth $1.3 billion. The deal allowed ILFC to lower its massive borrowing costs by using the insurer’s excellent credit rating.

But all that vanished when AIG teetered on the verge of collapse in fall 2008. The combination of surging borrowing costs and plunging demand for aircraft forced ILFC to put much of its business on hold for nearly 18 months. AIG had to seek federal government permission to tap a special line of financing from the Federal Reserve Bank of New York to keep meet ILFC’s existing debt obligations.

The credit crunch finally eased early last year, allowing ILFC to go back out to the credit markets and start buying aircraft.

Meanwhile, AIG, under pressure from the federal government to restructure and repay the bailout funds, declared ILFC a noncore asset. AIG executives first sought to sell ILFC outright, but the latter’s balance sheet and credit difficulties meant that AIG would realize a less than optimal sale price.

“Either they were unable to find someone to buy it at all or they were unable to find someone to buy it at a price above what they thought they could get on the public markets,” said Paul Newsome, managing director in the Chicago office of New York-based Sandler O’Neill and Partners.

So AIG decided to take the spinoff and IPO route. But instead of doing it all at once, the company opted to phase it in over three years.

“With large share offerings like this, the market won’t be able to absorb all the shares at once,” said Larry Harris, professor of finance and business economics at the USC Marshall School of Business. “So they bring small pieces of the company to market over time.”

However, it’s not clear if even that measured approach will work. While Air Lease had a successful IPO, its share price has since slid more than 20 percent. That does not bode well for ILFC’s public offering.

“The IPO market has hit a stone wall of retreating stock prices,” said John Fitzgibbon, founder of IPOScoop.com in New York.

Meanwhile, industry analysts say the spinoff and IPO will likely have little effect on ILFC’s operations in Los Angeles – at least in the short run. Virtually all of the company’s 214 employees – mostly sales, marketing and administrative types and including Chief Executive Courpron – work in the Century City office.

“The footprint of the company will probably stay pretty much the same,” said Chris DeNicolo, director of corporate and government ratings for Standard & Poor’s in New York. “Since ILFC resumed borrowing last year, it’s pretty much been acting independently of AIG already.”

Indeed, Standard & Poor’s has a more positive spin on the company’s future than aviation consultant Keady. DeNicolo noted ILFC already has adjusted to higher borrowing costs given AIG’s downgraded credit status. After the filing notice of the planned IPO, Standard & Poor’s Financial Services issued a statement saying the filing would have no effect on the rating agency’s outlook on ILFC, which stands at “BBB-.”

DeNicolo added that the talent exodus also has eased.

“A year ago, we had our own concerns about turnover of talent, but the organization had enough bench strength to maintain the company’s competitive position,” he said.

In the longer run, the spinoff could set the stage for expansion. That’s because more of the earnings can be plowed back into the business instead of being passed on up the chain to AIG in New York.

“Any step to get them out from AIG ownership is a positive,” said B. Riley’s Presson. “It will be able to direct more of its earnings into future growth of the business. The decisions will be made here at the local level.”

There also will be one other local benefit: taxes. With the corporate headquarters in Century City and no longer a subsidiary of AIG, more tax dollars will likely flow to state and local government coffers in California.


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