ILFC swaps fly higher

Airplane lessor International Lease Finance Corporation (ILFC), a unit of American International Group (AIG), has seen its credit default swaps double in the past few months as worries about an possible recession and profit hit in the overall airline sector scare investors away from the highly indebted company which could still potentially IPO in coming months.

As reported in Bloomberg,

ILFC has cut outstanding debt by almost 20 percent to $25.8 billion over the year through June 30. It sold five-year notes after the upgrade at a 5.75 percent yield, 2.88 percentage points less than similar-maturity debt issued in 2010, after being shut out of the bond market in 2009.

The unit’s ratio of debt to trailing 12 months earnings before interest, taxes, depreciation and amortization fell to 5.33 at the end of the first quarter from 7.85 at the end of the third quarter of 2008, according to data compiled by Bloomberg…….

Credit-default swaps on the company climbed this month as global stocks tumbled and speculative-grade debt issuance all but evaporated. The cost reached as high as 663 basis points on Aug. 11, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts have held at prices that imply ILFC’s debt should be rated B2, according to Moody’s Corp.’s capital markets group……..

Moody’s Investors Service rates ILFC’s senior unsecured debt B1 and changed its outlook to positive in May as ILFC builds “a capital cushion to absorb potential asset-quality and performance weakness,” the New York-based ratings company said.

The rating stripped out a one-level boost based on the assumption of AIG’s support, according to the Moody’s note.

“Because ILFC has strengthened its stand alone credit profile, the B1 rating no longer relies on an assumption of AIG support,” Moody’s analysts Mark Wasden and Robert Young wrote in a note dated May 12.

Credit-default swaps tied to ILFC’s debt, which typically fall as investor confidence improves, are down from a record 1,710 basis points in March 2009, according to CMA. They eased from 809 basis points in June 2010 after it sold assets and took advantage of record-low borrowing costs to refinance debt coming due by 2012. The swaps climbed 22.5 basis points today to 632 basis points as of 9:52 a.m. in New York, CMA data show.

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