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Lease snag unlikely to delay AIG designation

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AIG announced it has not received about $420 million required as an interim step toward completion of the sale of its leasing subsidiary to a Chinese investment group sometime in June.

However, this snag — and the potential it raises that the sale could fall through — is unlikely to delay designation of AIG as a systemically significant nonbank by the government — a step that could occur as early as June 3.

Speculation centers on AIG, Prudential Financial, GE Capital to be the first nonbank SIFIs designated.

John Nadel, an analyst at Sterne Agee & Leach in New York, implied in an investor’s note that the only potential impact on AIG from the the failure of the deal to go through would be that the company could rethink the timing of share repurchases.

In his note, Nadel pointed to “press reports that the Financial Stability Oversight Council could meet and “formally designate the first wave of nonbank Systemically Significant Financial Institutions” June 3.

“Whether it occurs Monday or at a later date, we fully expect (in line w/consensus) AIG will be among the first nonbank SIFI designated,” said Nadel, adding “a designation alone means very little without understanding what the formal rules, stress testing, etc. will be.”

And without that knowledge, “we suspect managements (AIG included) will be less likely to repurchase shares given the risk that ultimately the rules prove more onerous than expected.”

“Clearly we could be wrong on this,” he wites, “but considering the upside vs. the downside from management’s and the board’s perspective of getting something wrong, we continue to believe management is more likely to be patient and await clarity on the formal rules,” Nadel said.

As to the leasing unit, AIG agreed in December to sell up to 90 percent of its leasing business, International Leasing Finance Corp., to a Chinese consortium for up to $4.8 billion.

AIG announced this morning it has not received the 10 percent of purchase price, about $420 million, due to be escrowed by the buyer of ILFC as of the due date May 30th.

“AIG did not indicate whether this alone has yet put the deal in jeopardy of being terminated, though we note AIG does retain the right, based on the purchase agreement, to terminate the deal as a result of the escrow not being received timely,” Nadel said.

The sale was for a far cheaper price than AIG sought and will lead to a substantial loss. But AIG wanted to sell the unit to simplify the company and because of the great amounts of borrowing needed to finance the leasing unit, analysts said.

Another reason, according to a July 2012 filing, is that ILFC is having difficulty placing aircraft it owned and leased to airlines that have since gone bankrupt. Furthermore, the number of carriers in arrears on rental payments has doubled over the past year.

In its filing, ILFC cited such recent challenges in the global economy as the European sovereign debt crisis, political uncertainty in the Middle East, and sustained higher fuel prices. This has increased the “probability that some airlines, including our customers, will cease operations or file for bankruptcy.”