American International Group (AIG) has closed the final chapter of the sale of International Lease Financing Corporation (ILFC) to AerCap with the public offering of 71.2 million AerCap shares, reducing its stake in the aircraft lessor to just 5%. AIG had expected to sell just 50 million shares but there was such phenomenal demand for the paper that the deal was upsized.
At the close of the market on June 3, the shares priced $49 per share, a premium of 1.6% to the filed price of $48.24. The share sale is the largest ever public or private offering of common stock in the aircraft leasing sector.
Citigroup and Goldman Sachs are global coordinators and joint book running managers, and JPMorgan, Morgan Stanley and UBS are serving as joint book running managers for the underwritten offering. AIG has granted the underwriters a 30-day option to purchase up to an additional 10.7 million ordinary shares, which would fully exit AIG’s interest in AerCap.
AerCap bought back an additional 15.7 million of its ordinary shares from AIG for $750 million, at an approximate price per share of $47.77. This was funded by the issuance of $500 million of junior subordinated notes to AIG and $250 million of cash on hand.
AerCap Global Aviation Trust, a wholly-owned subsidiary of AerCap, will issue to AIG $500 million in junior subordinated notes due 2045. The 30 year notes will initially accrue interest at a fixed interest rate of 6.5% for a period of ten years whereupon they will convert to a floating rate. The issuer will have the right to defer any interest payment on the notes for up to five consecutive years per deferral period. The notes will be guaranteed by AerCap and its subsidiaries.
Although unusual, this sort of structure is not unheard but it is essentially as close to equity as you can get in a debt structure, but it is priced much more cheaply and is therefore accretive, which is a fantastic deal for AerCap shareholders. Although the share buyback and financing is not likely to affect AerCap’s corporate credit rating (S&P has already confirmed AerCap’s rating of BB+/Positive), AerCap may receive equity credit from S&P and Fitch for the new debt. AerCap’s net leverage has increased to 3.5x from 3.2x, however the lessor remains on target to reduce its leverage to 3.0x by the end of 2015 – well ahead of its target set when it purchased ILFC.
For AIG, this marks the successful end to the ILFC sale saga, which post financial crisis looked in doubt at times. AIG Chief Executive Officer Peter said in a statement: “We are pleased that, since the time of announcement of the sale of ILFC to AerCap, the value of the transaction has increased by more than $2.2 billion.”
The demand for the offering was very strong and was upsized since it was multiple times oversubscribed and attracted a strong roster of shareholders of new and existing names. Sources state that there were many blue chip name investors that came into the deal with substantial orders.
Sources in the market are describing the upsized offering from AIG and the simultaneous share repurchase by AerCap as "remarkable achievements". The AerCap team are reported to have worked tirelessly on the deal, specifically CEO Aengus Kelly, CFO Keith Helming and head of investor relations John Wikoff, who marketed the AerCap story to a large pool of investors.
This deal is not only wonderful news for AerCap and AIG, but the broader aircraft leasing sector. It has almost doubled AerCap’s existing public float and has attracted new, high-quality investors into this space. It is a victory for all publically-listed lessors since it will ultimately benefit them and may entice other private leasing platforms to go public.
Moreover the timing is perfect for one listed lessor specifically, Avolon. Once the lock up for the 80% holding in Avolon held by CIC, Cinven, GIC and Oakhill expires in July 2015, they are expected to sell some shares as soon as possible to benefit from the success of the AIG offering. An added advantage is that most large secondary offerings have come to market at discounts of 5% to 10% to the filed price. As such for investors who missed out on the AIG/AerCap sale, Avolon presents yet another opportunity to participate in the public aircraft leasing sector.