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Originally published March 24, 2009 at 12:00 AM | Page modified March 24, 2009 at 9:24 AM

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Boeing's biggest customer, ILFC, maneuvers for money to buy planes

Boeing's biggest customer, leasing company ILFC, has not nailed down the financing it needs for this year and is scrambling for a new approach.

Seattle Times aerospace reporter

Steven Udvar-Hazy led an industry chorus at an aviation conference last week that warned of a potential shortfall in financing to pay for Boeing's expected airplane deliveries this year.

As chief executive of the world's largest jet-leasing company, International Lease Finance Corp. (ILFC), Udvar-Hazy has a ringside view of that problem. And he's having to work hard to avoid becoming part of it.

Udvar-Hazy insisted in an interview ILFC will be able to pay for the four large 777s and dozen single-aisle 737-800s it's due to receive from Boeing this year, and said he may even take more 737s.

But ILFC, a subsidiary of the insurance giant AIG that's now on taxpayer-financed life support, has not nailed down the financing. Udvar-Hazy is scrambling to come up with new sources of money.

"Since the September meltdown, ... since we had this AIG crisis, we have paid cash for all our Boeing deliveries," Udvar-Hazy said. "We can't sustain that forever."

One door he's knocking on belongs to the Export-Import Bank of the United States, a source of financing he hasn't tapped in the past.

In Phoenix, Udvar-Hazy met jointly with Boeing and officials of the Ex-Im Bank in an effort to pin down loan guarantees for 2009 deliveries.

Airbus deliveries to Udvar-Hazy's company already have been backed by loan guarantees from the export-credit agencies of European governments.

His 2009 Boeing jets are destined for overseas airlines, so they count as U.S. exports and qualify for Ex-Im Bank support to promote U.S. jobs — in this case Boeing jobs.

But the Ex-Im Bank is not yet on board.

"We're talking," said Robert Morin, the Ex-Im Bank vice president who oversees the financing of all airplane exports. "Steve drives a hard bargain. And so does the U.S. government."

ILFC is the largest customer of both Airbus and Boeing and owns more than $50 billion worth of mostly wide-body commercial jets.

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But the company's financial standing is greatly diminished by its status as a unit of AIG.

On the morning of Udvar-Hazy's meeting with the Ex-Im Bank, copies of USA Today delivered to every room in the conference hotel led with a story on the insurer's executive-bonuses scandal. A graphic showed the company's corporate logo besmirched with a rotten tomato oozing juice across the letters AIG.

It's a startling new position for Udvar-Hazy, whose Los-Angeles-based ILFC had nothing to do with AIG's financial meltdown. Founded by Udvar-Hazy in 1973 and acquired by AIG in 1990, ILFC made an operating profit of $1.1 billion in 2008, while AIG's capital markets and consumer credit units lost $42 billion.

Fallout from AIG

Yet AIG's depressed credit rating has dragged down ILFC's, closing the door to the cheap financing that has oiled Udvar-Hazy's deal-making for years.

Udvar-Hazy, who owned more than $1.4 billion worth of AIG shares before the stock's crash from $70 to less than $2, said he understands why people are hurling rotten tomatoes at AIG.

"I sympathize with their feelings, as a shareholder that has been hurt immensely," he said. "But I'm not going to go and recriminate about it."

The U.S. government — which now owns about 80 percent of AIG — is eager to cash in the conglomerate's most solid assets, and ILFC is for sale. Udvar-Hazy won't comment on the sale process, but at least one private equity firm is very actively negotiating for the company, according to a Wall Street source familiar with the details.

Yet the barriers to a quick deal are high. In addition to its valuable airplane assets, ILFC has more than $30 billion in debt that any new owner would have to refinance. It's a bad time to try to restructure debt.

While he awaits a sale, Udvar-Hazy is under pressure.

In an AIG filing with the Securities and Exchange Commission (SEC) this month, the company said that unless it can borrow more, cash flow will be "inadequate to permit ILFC to meet its obligations for 2009."

The most recent SEC filing for ILFC shows more than $10 billion in cash commitments in 2009, including $6.1 billion in maturing debt, $1.5 billion in interest on other debt, and some $3 billion in jet-purchase commitments.

Udar-Hazy says that he has $1 billion of financing "on the horizon," as well as "approximately $6 billion of cash generation ... from aircraft lease payments." He expects to raise about $500 million more from used-aircraft sales. And as of Jan. 1, ILFC had $2.3 billion in cash on hand.

That still leaves an apparent gap between the commitments and available cash of more than half a billion dollars.

But Udvar-Hazy denies there is a "cash crunch." He said that sometime after the liquidity warning in AIG's early March filing, ILFC won additional financing.

And even as he talks to prospective acquirers of ILFC, Udvar-Hazy said he is negotiating further restructuring of $2 billion of the debt that matures this year, to push out and smooth the repayment schedule.

And he'd like that Ex-Im Bank support to finance this year's Boeing jets.

But what if the debt restructuring falls short and all the loans he needs are not forthcoming during the credit squeeze?

Udvar-Hazy said that, whatever happens, ILFC will meet its commitments for the year.

If the company is sold, the new investors will take over the debt.

If it's not sold and remains part of AIG, then he expects AIG — now controlled by the government — to step in and avoid default.

"Why wouldn't AIG and the government support their most valuable unit?" Udvar-Hazy asked.

Default would sting

ILFC defaulting on its bond debt could trigger a fire sale of its valuable jets and torpedo its planned purchases from Boeing and Airbus.

A Wall Street investment analyst, whose bank won't permit him to be quoted by name in the media, said AIG could use some of its government bailout funds to prevent that.

"It's not in the interests of AIG or the U.S. taxpayer to let (ILFC) run into a bond default," the analyst said. "If you let this company go down, you are going to destroy more value. If you let it fall, that means real job losses at Boeing and all the Boeing suppliers."

As he maneuvers to preserve the glittering jet empire he built up over more than 30 years, Udvar-Hazy says he's "optimistic."

"I cannot change the past," he said, "but I can certainly change ILFC's future."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Copyright © 2009 The Seattle Times Company

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