Attached files
file | filename |
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EX-12 - EX-12 - INTERNATIONAL LEASE FINANCE CORP | v56821exv12.htm |
EX-2.1 - EX-2.1 - INTERNATIONAL LEASE FINANCE CORP | v56821exv2w1.htm |
EX-3.2 - EX-3.2 - INTERNATIONAL LEASE FINANCE CORP | v56821exv3w2.htm |
EX-10.4 - EX-10.4 - INTERNATIONAL LEASE FINANCE CORP | v56821exv10w4.htm |
EX-31.1 - EX-31.1 - INTERNATIONAL LEASE FINANCE CORP | v56821exv31w1.htm |
EX-32.1 - EX-32.1 - INTERNATIONAL LEASE FINANCE CORP | v56821exv32w1.htm |
EX-10.2 - EX-10.2 - INTERNATIONAL LEASE FINANCE CORP | v56821exv10w2.htm |
EX-31.2 - EX-31.2 - INTERNATIONAL LEASE FINANCE CORP | v56821exv31w2.htm |
EX-10.3 - EX-10.3 - INTERNATIONAL LEASE FINANCE CORP | v56821exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number 001-31616
INTERNATIONAL LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization) |
22-3059110 (I.R.S. Employer Identification No.) |
10250 Constellation Blvd., Suite 3400 Los Angeles, California (Address of principal executive offices) |
90067 (Zip Code) |
Registrants telephone number, including area code: (310) 788-1999
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of August 6, 2010, there were 45,267,723 shares of Common Stock, no par value, outstanding.
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q
and is therefore filing this form with the reduced disclosure format.
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
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EX-2.1 | ||||||||
EX-3.2 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-12 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
-2-
Table of Contents
TABLE OF DEFINITIONS
AIG
|
American International Group, Inc. | |
AIG Funding
|
AIG Funding, Inc. | |
AIGFP
|
AIG Financial Products Corp. | |
Airbus
|
Airbus S.A.S. | |
AOCI
|
Accumulated other comprehensive income | |
ASC
|
FASB Accounting Standards Codification | |
Boeing
|
The Boeing Company | |
The Company, ILFC, we, our, us
|
International Lease Finance Corporation | |
CPFF
|
FRBNY Commercial Paper Funding Facility | |
CVA
|
Credit Value Adjustment | |
ECA
|
Export Credit Agency | |
FASB
|
Financial Accounting Standards Board | |
Fitch
|
Fitch Ratings, Inc. | |
FRBNY
|
Federal Reserve Bank of New York | |
FRBNY Credit Agreement
|
The credit agreement, dated as of September 22, 2008, as amended, between AIG and the FRBNY | |
GAAP
|
Generally Accepted Accounting Principles in the United States of America | |
KrasAir
|
Krasnoyarsk Airlines | |
Moodys
|
Moodys Investor Service, Inc. | |
MVA
|
Market Value Adjustment | |
OCI
|
Other comprehensive income | |
QSPE
|
Qualifying special-purpose entity | |
SEC
|
U.S. Securities and Exchange Commission | |
S&P
|
Standard and Poors, a division of The McGraw-Hill Companies, Inc. | |
VaR
|
Value at Risk | |
VIEs
|
Variable Interest Entities | |
Volare
|
Estate of Volare Airlines | |
WKSI
|
Well Known Seasoned Issuer |
-3-
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
CONDENSED, CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents, including interest bearing
accounts of $2,962,212 (2010) and $324,827 (2009) |
$ | 2,969,395 | $ | 336,911 | ||||
Restricted cash, including interest bearing accounts of $825,706 (2010)
and $246,115 (2009) |
883,820 | 315,156 | ||||||
Notes receivable, net of allowance, and net investment in finance and
sales-type leases |
151,502 | 373,141 | ||||||
Flight equipment under operating leases |
55,067,929 | 57,718,323 | ||||||
Less accumulated depreciation |
14,255,035 | 13,788,522 | ||||||
40,812,894 | 43,929,801 | |||||||
Flight Equipment Held for Sale |
2,144,936 | | ||||||
Deposits on flight equipment purchases |
149,312 | 163,221 | ||||||
Lease receivables and other assets |
446,736 | 477,218 | ||||||
Derivative assets |
1,651 | 190,857 | ||||||
Variable interest entities assets |
| 79,720 | ||||||
Deferred debt issue costs, less accumulated amortization of $157,153
(2010) and $146,933 (2009) |
179,236 | 101,017 | ||||||
$ | 47,739,482 | $ | 45,967,042 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Accrued interest and other payables |
$ | 541,370 | $ | 474,971 | ||||
Current income taxes |
85,592 | 80,924 | ||||||
Tax benefit sharing payable to AIG |
| 85,000 | ||||||
Loans from AIG Funding |
3,938,487 | 3,909,567 | ||||||
Debt financing, net of deferred debt discount of $65,492 (2010) and
$9,556 (2009) |
26,485,463 | 24,802,172 | ||||||
Subordinated debt |
1,000,000 | 1,000,000 | ||||||
Foreign currency adjustment related to foreign currency denominated debt |
56,380 | 391,100 | ||||||
Derivative liabilities |
70,831 | | ||||||
Security deposits on aircraft, overhauls and other |
1,691,989 | 1,469,956 | ||||||
Rentals received in advance |
278,307 | 315,154 | ||||||
Deferred income taxes |
4,932,723 | 4,881,558 | ||||||
Variable interest entities liabilities, net |
| 6,464 | ||||||
Commitments and Contingencies Note K |
||||||||
SHAREHOLDERS EQUITY |
||||||||
Market Auction Preferred Stock, $100,000 per share liquidation
value; Series A and B, each having 500 shares issued
and outstanding |
100,000 | 100,000 | ||||||
Common stock no par value; 100,000,000 authorized shares,
45,267,723 issued and outstanding |
1,053,582 | 1,053,582 | ||||||
Paid-in capital |
605,504 | 603,542 | ||||||
Accumulated other comprehensive income (loss) |
(63,724 | ) | (138,206 | ) | ||||
Retained earnings |
6,962,978 | 6,931,258 | ||||||
Total shareholders equity |
8,658,340 | 8,550,176 | ||||||
$ | 47,739,482 | $ | 45,967,042 | |||||
See notes to condensed, consolidated financial statements.
-4-
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
REVENUES |
||||||||
Rental of flight equipment |
$ | 1,291,758 | $ | 1,298,870 | ||||
Flight equipment marketing |
(56,454 | ) | 9,282 | |||||
Interest and other |
8,791 | 22,001 | ||||||
1,244,095 | 1,330,153 | |||||||
EXPENSES |
||||||||
Interest |
407,708 | 353,213 | ||||||
Effect from derivatives, net of
change in hedged items due to
changes in
foreign
exchange rates |
4,783 | (6,441 | ) | |||||
Depreciation of flight equipment |
475,658 | 488,777 | ||||||
Provision for overhauls |
127,947 | 74,084 | ||||||
Flight equipment rent |
4,500 | 4,500 | ||||||
Selling, general and administrative |
49,141 | 51,623 | ||||||
1,069,737 | 965,756 | |||||||
INCOME BEFORE INCOME TAXES |
174,358 | 364,397 | ||||||
Provision for income taxes |
63,605 | 127,472 | ||||||
NET INCOME |
$ | 110,753 | $ | 236,925 | ||||
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
REVENUES |
||||||||
Rental of flight equipment |
$ | 2,616,511 | $ | 2,560,256 | ||||
Flight equipment marketing |
(492,605 | ) | 3,140 | |||||
Interest and other |
21,777 | 37,330 | ||||||
2,145,683 | 2,600,726 | |||||||
EXPENSES |
||||||||
Interest |
742,574 | 708,607 | ||||||
Effect from derivatives, net of change in
hedged items due to changes in
foreign
exchange rates |
44,849 | (4,327 | ) | |||||
Depreciation of flight equipment |
965,899 | 960,900 | ||||||
Provision for overhauls |
222,837 | 143,385 | ||||||
Flight equipment rent |
9,000 | 9,000 | ||||||
Selling, general and administrative |
84,778 | 103,862 | ||||||
2,069,937 | 1,921,427 | |||||||
INCOME BEFORE INCOME TAXES |
75,746 | 679,299 | ||||||
Provision for income taxes |
27,919 | 239,417 | ||||||
NET INCOME |
$ | 47,827 | $ | 439,882 | ||||
See notes to condensed, consolidated financial statements.
-5-
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
CONDENSED, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
NET INCOME |
$ | 110,753 | $ | 236,925 | ||||
OTHER COMPREHENSIVE INCOME, NET OF TAX |
||||||||
Net changes in fair value of cash flow
hedges, net of taxes of $(13,485) (2010)
and $15,224 (2009) |
25,045 | (28,274 | ) | |||||
Change in unrealized appreciation on
securities available for sale, net of taxes
of $79 (2010) and $(32) (2009) |
(147 | ) | 59 | |||||
24,898 | (28,215 | ) | ||||||
COMPREHENSIVE INCOME |
$ | 135,651 | $ | 208,710 | ||||
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
NET INCOME |
$ | 47,827 | $ | 439,882 | ||||
OTHER COMPREHENSIVE INCOME, NET OF TAX |
||||||||
Net changes in fair value of cash flow
hedges, net of taxes of $(40,172) (2010)
and $5,448 (2009) |
74,606 | (10,118 | ) | |||||
Change in unrealized appreciation on
securities available for sale, net of taxes
of $66 (2010) and $(12) (2009) |
(123 | ) | 22 | |||||
74,483 | (10,096 | ) | ||||||
COMPREHENSIVE INCOME |
$ | 122,310 | $ | 429,786 | ||||
See notes to condensed, consolidated financial statements.
-6-
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
OPERATING ACTIVITIES |
||||||||
Net (Loss) income |
$ | 47,827 | $ | 439,882 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation of flight equipment |
965,899 | 960,900 | ||||||
Change in deferred income taxes |
19,754 | 234,379 | ||||||
Change in fair value of derivative instruments |
374,814 | (75,227 | ) | |||||
Foreign currency adjustment of non-US$ denominated debt |
(334,720 | ) | 67,570 | |||||
Amortization of deferred debt issue costs |
21,873 | 22,628 | ||||||
Amortization of debt discount |
4,983 | 6,873 | ||||||
Amortization of prepaid lease costs |
20,282 | 27,741 | ||||||
Aircraft impairment charges |
412,457 | | ||||||
Lease expenses related to aircraft sales |
89,213 | | ||||||
Interest paid-in-kind to AIG Funding |
28,920 | | ||||||
Other, including foreign exchange adjustments on foreign currency
denominated cash |
(18,192 | ) | (8,167 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Decrease (increase) in lease receivables and other assets |
51,776 | (62,569 | ) | |||||
Increase in accrued interest and other payables |
65,689 | 34,733 | ||||||
Change in current income taxes |
4,668 | 1,365 | ||||||
Tax benefit sharing with AIG |
(85,000 | ) | | |||||
(Decrease) increase in rentals received in advance |
(36,847 | ) | 2,023 | |||||
Net cash provided by operating activities |
1.633,396 | 1,652,131 | ||||||
INVESTING ACTIVITIES |
||||||||
Acquisition of flight equipment for operating leases |
(219,450 | ) | (2,058,544 | ) | ||||
Payments for deposits and progress payments |
(22,974 | ) | (49,657 | ) | ||||
Proceeds from disposal of flight equipment net of gain |
24,641 | 89,434 | ||||||
Increase in restricted cash |
(568,664 | ) | (264,239 | ) | ||||
Collections on notes receivable and finance and sales-type leases
net of income amortized |
59,791 | 89,246 | ||||||
Other |
| (11 | ) | |||||
Net cash used in investing activities |
(726,656 | ) | (2,193,771 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net change in commercial paper |
| (1,752,000 | ) | |||||
Loans from AIG Funding |
| 1,700,000 | ||||||
Proceeds from debt financing |
4,315,872 | 1,328,099 | ||||||
Payments in reduction of debt financing |
(2,637,564 | ) | (2,022,980 | ) | ||||
Debt issue costs |
(100,131 | ) | (44,847 | ) | ||||
Payment of preferred dividends |
(207 | ) | (2,560 | ) | ||||
Increase (decrease) in customer and other deposits |
152,616 | (52,779 | ) | |||||
Net cash provided by (used in) financing activities |
1,730,586 | (847,067 | ) | |||||
Net increase (decrease) in cash |
2,637,326 | (1,388,707 | ) | |||||
Effect of exchange rate changes on cash |
(4,842 | ) | 215 | |||||
Cash at beginning of period |
336,911 | 2,385,948 | ||||||
Cash at end of period |
$ | 2,969,395 | $ | 997,456 | ||||
(Table continued on following page)
-7-
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Dollars in thousands)
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
Cash paid during the period for: |
||||||||
Interest, excluding interest
capitalized of $3,080 (2010)
and $7,216 (2009) |
$ | 642,037 | $ | 708,278 | ||||
Income taxes, net |
3,495 | 3,673 |
Non-Cash Investing and Financing Activities
2010:
Flight equipment under operating leases in the amount of $2,165,077 was transferred to Flight
equipment held for sale.
Net investment in finance leases of $192,161 was transferred to Flight equipment under
operating leases.
$29,177 of Deposits on flight equipment purchases was applied to Acquisition of flight
equipment under operating leases.
$11,193 of Lease receivables and other assets and $36,799 of Deposits on flight equipment
purchases were applied to Acquisition of flight equipment under operating leases.
Flight equipment under operating leases in the amount of $3,225 was transferred to Lease
receivables and other assets.
2009:
$357,669 of Deposits on flight equipment purchases was applied to Acquisition of flight
equipment under operating leases.
An aircraft with a net book value of $20,921 and released overhaul reserves in the amount of
$6,891 were reclassified to Lease receivables and other assets of $33,223 to reflect pending
proceeds from the loss of an aircraft.
An aircraft with a net book value of $10,521 was reclassified to Lease receivables and other
assets in the amount of $2,400 with a $7,507 charge to income when reclassified to Flight
equipment held for sale.
$1,500 was reclassified from Security deposits on aircraft, overhauls and other to Deposits on
flight equipment purchases for concessions received from manufacturers.
A reduction in certain credits from aircraft and engine manufacturers in the amount of $742
increased the basis of Flight equipment under operating leases and decreased Lease receivables
and other assets.
See notes to condensed, consolidated financial statements.
-8-
Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
A. | Basis of Preparation |
ILFC is an indirect wholly-owned subsidiary of AIG. AIG is a holding company, which,
through its subsidiaries, is primarily engaged in a broad range of insurance and
insurance-related activities in the United States and abroad. The accompanying unaudited,
condensed, consolidated financial statements have been prepared in accordance with GAAP for
interim financial information and in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements.
The accompanying unaudited, condensed, consolidated financial statements include our
accounts, accounts of all other entities in which we have a controlling financial interest, as
well as accounts of VIEs in which we are the primary beneficiary. Prior to January 1, 2010, the
primary beneficiary of a VIE was defined as the party with a variable interest in an entity
that absorbs the majority of the expected losses of the VIE, receives the majority of the
expected residual returns of the VIE, or both. On January 1, 2010, a new accounting standard
became effective that changed the primary beneficiary to the enterprise that has the power to
direct the activities of a VIE that most significantly affect the entitys economic
performance, in addition to looking at which party absorbs losses and has the right to receive
benefits, as further discussed in Note B Recent Accounting Pronouncements. See Note L
Variable Interest Entities for further discussions on VIEs. All material intercompany accounts
have been eliminated in consolidation. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair statement of the
results for the interim periods presented have been included. Certain reclassifications have
been made to the 2009 unaudited, condensed, consolidated financial statements to conform to the
2010 presentation. Operating results for the six months ended June 30, 2010, are not
necessarily indicative of the results that may be expected for the year ending December 31,
2010. These statements should be read in conjunction with the consolidated financial statements
and footnotes thereto included in our Annual Report on Form 10-K for the year ended December
31, 2009.
AIG Going Concern Consideration
In connection with the preparation of its quarterly report on Form 10-Q for the quarter
ended June 30, 2010, AIG management assessed whether AIG has the ability to continue as a going
concern. Based on the U.S. governments continuing commitment, the already completed
transactions with the FRBNY, AIG managements plans and progress made to stabilize its
businesses and dispose of certain of its assets, and after consideration of the risks and
uncertainties of such plans, AIG management indicated in the AIG quarterly report on Form 10-Q
for the period ended June 30, 2010, that it believes that it will have adequate liquidity to
finance and operate its businesses, execute its asset disposition plan, and repay its
obligations for at least the next twelve months. It is possible that the actual outcome of one
or more of AIG managements plans could be materially different, or that one or more of AIG
managements significant judgments or estimates about the potential effects of these risks and
uncertainties could prove to be materially incorrect, or that the transactions with the FRBNY
discussed in AIGs Form 10-Q fail to achieve their desired objectives. If one or more of these
possible outcomes is realized and financing is not available, AIG may need additional U.S.
government support to meet its obligations as they come due. If AIG is not able to continue as
a going concern it will have a significant impact on our operations, including limiting our
ability to issue new debt.
B. | Recent Accounting Pronouncements |
We adopted the following accounting standards during the first six months of 2010:
Accounting for Transfers of Financial Assets
In June 2009, the FASB issued an accounting standard addressing transfers of financial
assets that removes the concept of a QSPE from the FASB ASC and removes the exception from
applying the consolidation rules to QSPEs. The new standard was effective for interim and
annual periods beginning on
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Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
January 1, 2010. Earlier application was prohibited. The adoption of the new standard had no
effect on our consolidated financial position, results of operations, or cash flows, as we are
not involved with any QSPEs.
Consolidation of Variable Interest Entities
In June 2009, the FASB issued an accounting standard that amended the rules addressing the
consolidation of VIEs, with an approach focused on identifying which enterprise has the power
to direct the activities of a VIE that most significantly affect the entitys economic
performance and has (i) the obligation to absorb losses of the entity or (ii) the right to
receive benefits from the entity. The new standard also requires enhanced financial reporting
by enterprises involved with VIEs. The new standard was effective for interim and annual
periods beginning on January 1, 2010, with earlier application prohibited. We determined that
we were not involved with any VIEs that were not previously consolidated and had to be
consolidated as a result of the adoption of this standard. However, we determined that we do
not control the activities that significantly impact the economic performance of ten of the
VIEs that were consolidated as of the adoption of the standard. Accordingly, on January 1,
2010, we deconsolidated these entities and we removed Assets of VIEs and Liabilities of VIEs
from our consolidated balance sheet of $79.7 million and $6.5 million, respectively. The assets
and liabilities of these entities were previously reflected on our Consolidated Balance Sheet
at December 31, 2009. Our involvement at June 30, 2010, with these entities is reflected in
investments in senior secured notes of $44.9 million and guarantee liabilities of $3.0 million.
As a result of the adoption of this standard, we recorded a $15.9 million charge, net of tax,
to beginning retained earnings on January 1, 2010. See Note L Variable Interest Entities.
Measuring Liabilities at Fair Value
In August 2009, the FASB issued an accounting standards update to clarify how to apply the
fair value measurement principles when measuring liabilities carried at fair value. The update
explains how to prioritize market inputs in measuring liabilities at fair value and what
adjustments to market inputs are appropriate for debt obligations that are restricted from
being transferred to another obligor. The update was effective for interim and annual periods
ending after December 15, 2009. The adoption of the update did not have any effect on our
consolidated financial position, results of operations or cash flows, but affected the way we
valued our debt when disclosing its fair value.
Subsequent Events
In February 2010, the FASB amended a previously issued accounting standard to require all
companies that file financial statements with the SEC to evaluate subsequent events through the
date the financial statements are issued. The standard was further amended to exempt these
companies from the requirement to disclose the date through which subsequent events have been
evaluated. This amendment is effective for us for interim and annual periods ending after June
15, 2010. Because this new standard only modifies disclosures, its adoption will have no effect
on our consolidated financial position, results of operations or cash flows.
Future Application of Accounting Standards:
Disclosures of the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued an accounting standards update to require enhanced,
disaggregated disclosures regarding the credit quality of finance receivables and the allowance
for credit losses. The update is effective for interim and annual reporting periods ending on
or after December 15, 2010. We are currently evaluating the increased annual and interim
financial statement disclosure requirements. Because this update only modifies disclosure
requirements, its adoption will have no effect on our consolidated financial position, results
of operations or cash flows.
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
C. | Flight Equipment Marketing |
During the six months ended June 30, 2010, to generate liquidity to repay maturing debt
obligations, we agreed to sell 61 aircraft from our leased fleet to third parties. Primarily as
a result of these sales, we reported losses of $56.5 million and $492.6 million for the three
and six month periods ended June 30, 2010, respectively, in Flight equipment marketing as
follows:
Three Months Ended | Six Months Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
(Dollars in millions) | ||||||||
Impairment charges on Flight equipment held for
sale, aircraft sold, or aircraft designated for
part-out |
$ | 53.0 | $ | 404.3 | ||||
Lease related charges on Flight equipment held
for sale or aircraft sold |
5.2 | 89.2 | ||||||
Other net flight equipment marketing activity |
(1.7 | ) | (0.9 | ) | ||||
$ | 56.5 | $ | 492.6 | |||||
Management evaluates all contemplated aircraft sale transactions as to whether all
the criteria required have been met under GAAP in order to classify an aircraft as Flight
equipment held for sale. Management uses judgment in evaluating these criteria. Due to the
uncertainties and uniqueness of any potential sale transaction, the criteria generally will not
be met for an aircraft to be classified as Flight equipment held for sale unless the aircraft
is subject to a signed sale agreement, or management has made a specific determination and
obtained appropriate approvals to sell a particular aircraft or group of aircraft. At the time
aircraft are sold, or classified as Flight equipment held for sale, the cost and accumulated
depreciation are removed from the related accounts. Any gain or loss recognized is recorded in
Flight equipment marketing in our Condensed, Consolidated Statements of Income. Situations may
arise where an aircraft does not meet all the criteria to be classified as Flight equipment
held for sale, but an impairment charge is required under GAAP in anticipation of the sale. In
these cases, we record the impairment charge and other costs of sales in Flight equipment
marketing. When an impairment charge is required on aircraft in our leased fleet, and intended
to be held for use, we record the charge in Selling, general and administrative in our
Condensed, Consolidated Statements of Income.
Three months ended June 30, 2010:
For the three months ended June 30, 2010, we recorded the following amounts in Flight
equipment marketing:
| On July 6, 2010, we signed an agreement to sell six aircraft to a third party. As of June 30, 2010, the six aircraft met the criteria to be recorded as Flight equipment held for sale, and for the three-month period ended June 30, 2010, we recorded impairment charges in Flight equipment marketing aggregating $40.1 million and lease charges aggregating $5.9 million related to the six aircraft. The aggregate net book value of the six aircraft after we recorded an impairment charge of $40.1 million was approximately $290.7 million and is included in Flight equipment held for sale on our June 30, 2010, Condensed, Consolidated Balance Sheet. | ||
| As part of our normal recurring fleet assessment, we also recorded an impairment charge in Flight equipment marketing of $12.4 million for the three months ended June 30, 2010, related to one aircraft that was designated for part-out from our leased fleet during that period. |
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
Six months ended June 30, 2010:
In addition to the above transactions, for the six months ended June 30, 2010, the
following was recorded in Flight equipment marketing:
| On April 13, 2010, we signed an agreement to sell 53 aircraft from our existing fleet to a third party for an aggregate purchase price of $1.987 billion. At March 31, 2010, we considered the sale more likely than not to occur and deemed 50 of the 53 aircraft to be impaired. As a result, we recorded in Flight equipment marketing impairment charges aggregating $319.1 million and related lease charges aggregating $69.8 million for the three-month period ended March 31, 2010. The aggregate net book value of the portfolio after the recorded impairment charge of $319.1 million was approximately $1.9 billion. During the three months ended June 30, 2010, appropriate approvals were obtained, the sales agreement was signed and 50 of the 53 aircraft in the portfolio met the criteria required to be recorded as Flight equipment held for sale. We completed the sale of one of the 50 aircraft prior to June 30, 2010, and the net book value of the remaining 49 aircraft is included in Flight equipment held for sale, which is presented separately on our June 30, 2010, Condensed, Consolidated Balance Sheet. | ||
| On June 22, 2010, as part of our normal recurring fleet assessment, we sold two aircraft from our leased fleet. At March 31, 2010, we considered the sale more likely than not to occur and deemed the aircraft to be impaired. As a result, we recorded in Flight equipment marketing impairment charges aggregating $32.7 million and lease related charges aggregating $13.5 million relating to those two aircraft for the six-month period ended June 30, 2010. |
The completion of the sales of most of the aircraft classified as Flight equipment held
for sale are expected to occur during the remainder of 2010. Net cash proceeds from the sales
will be received as the individual aircraft sales are consummated. The actual aggregate loss
may differ from the impairment charge recorded depending on the timing of the completion of the
sale and whether any aircraft in the portfolio are subsequently substituted with different
aircraft. The 56 aircraft reclassified to Flight equipment held for sale generated aggregate
quarterly lease revenue of approximately $70.0 million and the quarterly depreciation
aggregated approximately $23.0 million.
D. | Restricted Cash |
We entered into ECA facility agreements in 1999 and 2004 through subsidiaries. See Note F
Debt Financings. Our current long-term debt ratings require us to segregate security
deposits, maintenance reserves and rental payments received under the leases of the aircraft
funded under the 1999 and 2004 ECA facilities (segregated rental payments are used to make
scheduled principal and interest payments on the outstanding debt). The segregated funds are
deposited into separate accounts controlled by the security trustees of the ECA facilities. At
June 30, 2010, we had segregated security deposits, maintenance reserves and rental payments
aggregating approximately $383 million related to aircraft funded under the ECA facilities. The
segregated amounts fluctuate with changes in security deposits, maintenance reserves, rental
payments and debt maturities related to the aircraft funded under the ECA facilities.
In March 2010, we entered into a $550 million secured term loan through a newly formed
subsidiary. The proceeds from this transaction are restricted until the collateral is
transferred to certain of our subsidiaries that guarantee the debt on a secured basis and whose
equity were pledged to secure the term loan. At June 30, 2010, $501 million of the proceeds
remained restricted. See Note F Debt Financings. At August 5, 2010, $74.2 million of the
$501 million had become available to us.
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
The subsidiaries described above meet the definition of a VIE and are non-restricted
subsidiaries, as defined in our public debt indentures. See Note F Debt Financings and Note
L Variable Interest Entities.
E. | Flight Equipment Held for Sale |
ILFC classifies aircraft as Flight equipment held for sale when management has received
appropriate approvals to sell the aircraft and is committed to a formal plan, the aircraft are
available for immediate sale, the aircraft are being actively marketed, the sale is anticipated
to occur during the ensuing year, and certain other specified criteria are met. Aircraft
classified as Flight equipment held for sale are recorded at the lower of their carrying amount
or estimated fair value. If the carrying value of the aircraft exceeds its estimated fair
value, then a loss is recognized in Flight equipment marketing in our Condensed, Consolidated
Statements of Income. Depreciation is not recorded on Flight equipment held for sale.
At June 30, 2010, 55 aircraft from two portfolio sales met the criteria for, and were
reclassified as, Flight equipment held for sale. As a result, $2.14 billion, representing the
estimated fair value of such aircraft, was recorded in Flight equipment held for sale. We did
not record depreciation expense on these assets subsequent to the transfer from Flight
equipment under operating leases. In addition, in accordance with the portfolio sales
agreements, we will transfer lease payments received subsequent to the execution dates of the
sales agreements to the buyer, and we have therefore recorded those payments aggregating $64.2
million, together with the related overhaul balances and security deposits aggregating $149.0
million, in Security deposits on aircraft, overhauls and other on our June 30, 2010 Condensed,
Consolidated Balance Sheet. We expect to complete the sales of most of these aircraft during
the remainder of 2010. The net cash proceeds from these sales will be received as the
individual aircraft sales are consummated.
F. | Debt Financings |
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Secured |
||||||||
ECA financings |
$ | 3,051,370 | $ | 3,004,763 | ||||
Loans from AIG Funding |
3,938,487 | 3,909,567 | ||||||
Bank debt (a) |
2,155,000 | | ||||||
Other secured financings (b) |
1,444,775 | 153,116 | ||||||
10,589,632 | 7,067,446 | |||||||
Unsecured |
||||||||
Bonds and Medium-Term Notes |
17,435,560 | 16,566,099 | ||||||
Bank debt |
2,464,250 | 5,087,750 | ||||||
19,899,810 | 21,653,849 | |||||||
Total Secured and Unsecured Debt Financing |
30,489,442 | 28,721,295 | ||||||
Less: Deferred debt discount |
(65,492 | ) | (9,556 | ) | ||||
30,423,950 | 28,711,739 | |||||||
Subordinated Debt |
1,000,000 | 1,000,000 | ||||||
$ | 31,423,950 | $ | 29,711,739 | |||||
(a) | On April 16 2010, we entered into an amendment to our revolving credit facility dated October 13, 2006. Upon effectiveness of this amendment, approximately $2.2 billion of our previously unsecured bank debt became secured by the equity interests in certain of our non-restricted subsidiaries. Those subsidiaries, upon completion of the transfer of certain aircraft into the subsidiaries, will hold a pool of aircraft with an appraised value of not less than 133% of the principal amount of the outstanding loans. | |
(b) | Includes secured financings non-recourse to ILFC of $121.7 million and $129.6 million at June 30, 2010 and December 31, 2009, respectively. |
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
The above amounts represent the anticipated settlement of our outstanding debt
obligations as of June 30, 2010 and December 31, 2009. Certain adjustments required to present
currently outstanding hedged debt obligations have been recorded and presented separately on
our Condensed, Consolidated Balance Sheets, including adjustments related to foreign currency
hedging and interest rate hedging activities.
We have created wholly-owned, or indirectly wholly-owned, subsidiaries for the purpose of
purchasing aircraft and obtaining financings secured by such aircraft. These entities are
non-restricted subsidiaries, as defined by our public debt indentures, and meet the definition
of a VIE. We have determined that we are the primary beneficiary of such VIEs and, accordingly,
we consolidate such entities into our condensed, consolidated financial statements. See Note L
Variable Interest Entities for more information on VIEs.
ECA Financings
We entered into ECA facility agreements in 1999 and 2004 through non-restricted
subsidiaries. The facilities were used to fund purchases of Airbus aircraft through 2001 and
June 2010, respectively. New financings are no longer available to us under either ECA
facility. The loans made under the ECA facilities were used to fund a portion of each
aircrafts net purchase price. The loans are guaranteed by various European ECAs. We have
collateralized the debt with pledges of the shares of wholly-owned subsidiaries that hold title
to the aircraft financed under the facilities.
In January 1999, we entered into the 1999 ECA facility to borrow up to $4.3 billion for
the purchase of Airbus aircraft delivered through 2001. We used $2.8 billion of the amount
available under this facility to finance purchases of 62 aircraft. Each aircraft purchased was
financed by a ten-year fully amortizing loan with interest rates ranging from 5.753% to 5.898%.
At June 30, 2010, 17 loans with an aggregate principal value of $72.8 million remained
outstanding under the facility and the net book value of the aircraft owned by the subsidiary
was $1.7 billion.
In May 2004, we entered into the 2004 ECA facility, which was most recently amended in May
2009 to allow us to borrow up to $4.6 billion for the purchase of Airbus aircraft delivered
through June 30, 2010. We used $4.3 billion of the available amount to finance purchases of 76
aircraft. Each aircraft purchased was financed by a ten-year fully amortizing loan. As of June
30, 2010, approximately $3 billion was outstanding under this facility. The interest rates on
the loans outstanding under the facility are either fixed or based on LIBOR and ranged from
0.39% to 4.71% at June 30, 2010. The net book value of the related aircraft was $4.4 billion at
June 30, 2010.
Our current long-term debt ratings require us to segregate security deposits, maintenance
reserves and rental payments received for aircraft with loan balances outstanding under the
1999 and 2004 ECA facilities (segregated rental payments are used to make scheduled principal
and interest payments on the outstanding debt). The segregated funds are deposited into
separate accounts pledged to and controlled by the security trustees of the facilities. In
addition, we must register the existing individual mortgages on the aircraft funded under both
the 1999 and 2004 ECA facilities in the local jurisdictions in which the respective aircraft
are registered (mortgages are only required to be filed on aircraft with loan balances
outstanding or otherwise as agreed in connection with the cross-collateralization as described
below). At June 30, 2010, we had segregated security deposits, maintenance reserves and rental
payments aggregating approximately $383 million related to aircraft funded under the 1999 and
2004 ECA facilities. The segregated amounts will fluctuate with changes in deposits,
maintenance reserves and debt maturities related to the aircraft funded under the facilities.
During the first quarter of 2010, we entered into agreements to cross-collateralize the
1999 ECA facility with the 2004 ECA facility. As part of such cross-collateralization we (i)
guaranteed the obligations under the 2004 ECA facility through our subsidiary established to
finance Airbus aircraft under our 1999 ECA facility;
(ii) agreed to grant mortgages over certain aircraft financed under the 1999 ECA facility
(including aircraft which are not currently subject to a loan under the 1999 ECA facility) and
security interests over other collateral related to the aircraft financed under the 1999 ECA
facility to secure the guaranty obligation; (iii)
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June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
accepted a loan-to-value ratio (aggregating
the loans and aircraft from the 1999 ECA facility and the 2004 ECA facility) of at least fifty
percent, in order to release liens (including the cross-collateralization arrangement) on any
aircraft financed under the 1999 ECA facility or other assets related to the aircraft; and (iv)
agreed to allow proceeds generated from certain disposals of aircraft to be applied to
obligations under both the 1999 ECA and 2004 ECA facilities.
We also agreed to additional restrictive covenants relating to the 2004 ECA facility,
restricting us from (i) paying dividends on our capital stock with the proceeds of asset sales
and (ii) selling or transferring aircraft with an aggregate net book value exceeding a certain
disposition amount, which is currently approximately $10.7 billion. The disposition amount will
be reduced by approximately $91.4 million at the end of each calendar quarter during the
effective period. The covenants are in effect from the date of the agreement until December 31,
2012. A breach of these restrictive covenants would result in a termination event for the ten
loans funded subsequent to the date of the agreement and would make those loans, which
aggregated $318.0 million at June 30, 2010, due in full at the time of such a termination
event.
In addition, if a termination event resulting in an acceleration event were to occur under
the 1999 or 2004 ECA facility, we would have to segregate lease payments, maintenance reserves
and security deposits received after such acceleration event occurred relating to all the
aircraft subject to the 1999 ECA facility, including those aircraft no longer subject to a
loan.
Loans from AIG Funding
In March 2009, we entered into two demand note agreements aggregating $1.7 billion with
AIG Funding in order to fund our liquidity needs. Interest on the notes was based on LIBOR with
a floor of 3.5%. On October 13, 2009, we amended and restated the two demand note agreements,
including extending the maturity dates, and entered into a new $2.0 billion credit agreement
with AIG Funding. We used the proceeds from the $2.0 billion loan to repay in full our
obligations under our $2.0 billion revolving credit facility that matured on October 15, 2009.
On December 4, 2009, we borrowed an additional $200 million from AIG Funding to repay maturing
debt. The amount was added to the principal balance of the new credit agreement. These loans,
aggregating $3.9 billion, mature on September 13, 2013, and are due in full at maturity with no
scheduled amortization. The loans initially bore interest at 3-month LIBOR plus a margin of
3.025%, which was subsequently increased to a margin of 6.025%, as discussed below. The funds
for the loans were provided to AIG Funding by the FRBNY pursuant to the FRBNY Credit Agreement.
In order to receive the FRBNYs consent to the loans, we entered into guarantee agreements to
guarantee the repayment of AIGs obligations under the FRBNY Credit Agreement up to an amount
equal to the aggregate outstanding balance of the loans from AIG Funding.
These loans (and the related guarantees) are secured by (i) a portfolio of aircraft and
all related equipment and leases, with an aggregate average appraised value as of April 26,
2010, of approximately $7.2 billion plus additional temporary collateral with an aggregate
average appraised value as of April 26, 2010, of approximately $9.2 billion that will be
released upon the perfection of certain security interests, as described below; (ii) any and
all collection accounts into which rent, maintenance reserves, security deposits and other
amounts owing are paid under the leases of the pledged aircraft; and (iii) the shares or other
equity interests of certain subsidiaries of ours that may own or lease the pledged aircraft in
the future. In the event the appraised value of the collateral held falls below certain levels,
we will be forced either to prepay a portion of the term loans without penalty or premium, or
to grant additional collateral.
We are also required to prepay the loans, without penalty or premium, upon (i) the sale of
a pledged aircraft (other than upon the sale or transfer to a co-borrower under the loans) in
an amount equal to 75% of the
net sale proceeds; (ii) the receipt of any hull insurance, condemnation or other proceeds
in respect of any event of loss suffered by a pledged aircraft in an amount equal to 75% of the
net proceeds received on account thereof; and (iii) the removal of an aircraft from the
collateral pool (other than in connection with the substitution of a non-pool aircraft for such
removed aircraft in accordance with the terms of the loans) in an
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June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
amount equal to 75% of the
most recent appraised value of such aircraft. In addition, we are required to repay the loans
in full upon the occurrence of a change in control, which is defined in the loan agreements to
include AIG ceasing to beneficially own 100% of our equity interests. We may voluntarily prepay
the loans in part or in full at any time without penalty or premium. On April 13, 2010, we
entered into an agreement to sell a portfolio of 53 aircraft, some of which serve as collateral
for the loans from AIG Funding, and we agreed with AIG Funding and the FRBNY not to make any
prepayment of the loans in connection with the sale but to substitute alternative aircraft for
the aircraft serving as collateral that are being sold. On July 6, 2010, we entered into an
agreement to sell a portfolio of six aircraft, all of which serve as collateral for the loans
from AIG Funding, and we intend to prepay the loans in an amount equal to 75% of the net sale
proceeds.
The loans contain customary affirmative and negative covenants and include restrictions on
asset transfers and capital expenditures. The loans also contain customary events of default,
including an event of default under the loans if an event of default occurs under the FRBNY
Credit Agreement. One event of default under the loans was the failure to perfect security
interests, for the benefit of AIG Funding and the FRBNY, in certain aircraft pledged as
collateral by December 1, 2009. We were unable to perfect certain of these security interests
in a manner satisfactory to the FRBNY by December 1, 2009, and as a result entered into
temporary waivers and amendments which (i) will require us to transfer pledged aircraft to
special purpose entities within a prescribed time period (not less than three months from the
date of notice) upon request, at any time by AIG Funding (the Transfer Mandate) and (ii)
allow us to release the temporary collateral of approximately $9.2 billion once we have
completed such transfers and perfected the security interests of all such aircraft for the
benefit of AIG Funding and the FRBNY. In addition, we were required to add certain aircraft
leasing subsidiaries as co-obligors on the loans. Pursuant to the temporary waiver and
amendment, until all perfection requirements with regard to the pledged aircraft have been
satisfied, the interest rate was increased to three-month LIBOR plus a margin of 6.025%, of
which 3.0% may be paid-in-kind (of which some has been added to the principal balance of the
loans and some has been paid in cash). Additionally, if we do not comply with a Transfer
Mandate within the prescribed time period, we will be in default under the loan agreements with
AIG Funding and the interest rate may increase to three-month LIBOR with a 2.0% floor plus a
margin of 9.025%. As of August 6, 2010, the FRBNY had not presented us with a Transfer Mandate.
Within 30 days after our compliance with the perfection requirements for all of the pledged
aircraft, including the transfer of all pledged aircraft to special purpose entities, a pool of
aircraft with a 50% loan-to-value ratio will be selected by AIG Funding and the FRBNY from the
pledged aircraft, and the remaining additional temporary collateral will be released. In
addition, after our compliance with the perfection requirements, the interest margin of the
loans will revert to 3.025%.
Secured Bank Debt
We have a revolving credit facility, dated October 13, 2006, under which the maximum
amount available of $2.5 billion is outstanding. On April 16, 2010, we entered into an
amendment to this facility with lenders holding $2.155 billion of the outstanding loans under
the facility (the Electing Lenders). Subject to the satisfaction of the collateralization
requirements discussed below, the Electing Lenders agreed to, among other things:
| Increase our permitted secured indebtedness basket under the credit facility from 12.5% to 35% of our Consolidated Tangible Net Assets, as defined in the credit agreement; | ||
| Extend the scheduled maturity date of their loans totaling $2.155 billion to October 2012. The extended loans will bear interest at LIBOR plus a margin of 2.15%, plus facility fees of 0.2% on the outstanding principal balance; and | ||
| Permit liens securing (i) the loans held by the Electing Lenders and (ii) certain funded term loans in an aggregate amount not to exceed $500 million. |
The collateralization requirement provides that the $2.155 billion of loans held by
Electing Lenders must be secured by a lien on the equity interests of certain of ILFCs
non-restricted subsidiaries that will own aircraft with aggregate appraised values of not less
than 133% of the $2.155 billion principal amount (the
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(Unaudited)
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June 30, 2010
(Unaudited)
Required Collateral Amount). We must
transfer all aircraft meeting the Required Collateral Amount to the pledged subsidiaries prior
to April 16, 2011. The amendment also requires, subject to our right to post cash collateral
for any shortfall, that we transfer one third of the required aircraft on or prior to October
16, 2010, and an additional one third of the required aircraft on or prior to January 16, 2011.
After we have transferred the required amount of aircraft to the pledged subsidiaries, the
credit facility includes an ongoing requirement, tested periodically, that the appraised value
of the eligible aircraft owned by the pledged subsidiaries must be equal to or greater than
100% of the Required Collateral Amount. This ongoing requirement is subject to the right to
transfer additional eligible aircraft to the pledged subsidiaries or ratably prepay the loans
held by the Electing Lenders. We also guarantee the loans held by the Electing Lenders through
certain other subsidiaries.
The amended facility permits us to incur liens securing certain additional secured
indebtedness prior to the satisfaction of the collateralization requirement, provided we use
any net cash proceeds from the additional secured indebtedness to prepay the obligations under
our revolving credit facility expiring in October 2010 and one of our term loans maturing in
2011. The amended facility prohibits us from re-borrowing amounts repaid under this facility
for any reason.
The remaining $345 million of loans held by lenders who are not party to the amendment
will mature on their originally scheduled maturity date in October 2011 without any increase to
the margin.
Other Secured Financing Arrangements
In May 2009, ILFC provided $39.0 million of subordinated financing to a non-restricted
subsidiary. The entity used these funds and an additional $106.0 million borrowed from third
parties to purchase an aircraft, which it leases to an airline. ILFC acts as servicer of the
lease for the entity. The $106.0 million loan has two tranches. The first tranche is $82.0
million, fully amortizes over the lease term, and is non-recourse to ILFC. The second tranche
is $24.0 million, partially amortizes over the lease term, and is guaranteed by ILFC. Both
tranches of the loan are secured by the aircraft and the lease receivables. Both tranches
mature in May 2018 with interest rates based on LIBOR. At June 30, 2010, the interest rates on
the $82.0 million and $24.0 million tranches were 3.504% and 5.204%, respectively. The entity
entered into two interest rate cap agreements to economically hedge the related LIBOR interest
rate risk in excess of 4.00%. At June 30, 2010, $95.1 million was outstanding under the two
tranches and the net book value of the aircraft was $139.6 million.
In June 2009, we borrowed $55.4 million through a non-restricted subsidiary,
which owns one aircraft leased to an airline. Half of the original loan amortizes over five
years and the remaining $27.7 million is due in 2014. The loan is non-recourse to ILFC and is
secured by the aircraft and the lease receivables. The interest rate on the loan is fixed at
6.58%. At June 30, 2010, $49.7 million was outstanding and the net book value of the aircraft
was $92.9 million.
On March 17, 2010, we entered into a $750 million term loan agreement secured by 43
aircraft and all related equipment and leases. The aircraft had an average appraised base
market value of approximately $1.3 billion, for an initial loan-to-value ratio of approximately
56%. The loan matures on March 17, 2015, and bears interest at LIBOR plus a margin of
4.75% with a LIBOR floor of 2.0%. The principal of the loan is payable in full at maturity
with no scheduled amortization, but we can voluntarily prepay the loan at any time, subject to
a 1% prepayment penalty prior to March 17, 2011. On March 17, 2010, we also entered into an
additional term loan agreement of $550 million through a newly formed non-restricted
subsidiary. The obligations of the subsidiary borrower are guaranteed on an unsecured
basis by ILFC and on a secured basis by certain non-
restricted subsidiaries of ILFC that hold title to 37 aircraft. The aircraft had an
average appraised base market value of approximately $969 million, for an initial loan-to-value
ratio of approximately 57%. The loan matures on March 17, 2016, and bears interest at LIBOR
plus a margin of 5.0% with a LIBOR floor of 2.0%. The principal of the loan is
payable in full at maturity with no scheduled amortization. The proceeds from this loan are
restricted from use in our operations until we transfer the related collateral to the
non-restricted subsidiaries. At June 30, 2010, $501 million of the proceeds remained
restricted. At August 5, 2010, $74.2 million of the $501 million had become available to us. We
can voluntarily prepay the loan at any time subject
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
to a 2% prepayment penalty prior to March
17, 2011, and a 1% prepayment penalty prior to March 17, 2012. Both loans require a
loan-to-value ratio of no more than 63%.
Bonds and Medium-Term Notes
Automatic Shelf Registration: We have an effective automatic shelf registration statement
filed with the SEC. As a result of our WKSI status, we have an unlimited amount of debt
securities registered for sale. At June 30, 2010, we had $12.8 billion of bonds and MTNs
outstanding, issued under previous registration statements, with interest rates ranging from
0.62% to 7.95%.
Euro Medium-Term Note Programme: We have a $7.0 billion Euro Medium-Term Note Programme,
under which we have $1.9 billion of Euro denominated notes outstanding. The notes mature
through 2011 and bear interest based on Euribor with spreads ranging from 0.375% to 0.450%. We
have hedged the notes into U.S. dollars and fixed interest rates ranging from 4.615% to 5.367%.
The programme is perpetual and the principal amount of a bond becomes available for new
issuances at maturity.
Other Senior Notes: On March 22, 2010 and April 6, 2010, we issued a combined $1.25
billion aggregate principal amount of 8.625% senior notes due September 15, 2015, and $1.5
billion aggregate principal amount of 8.750% senior notes due March 15, 2017, pursuant to an
indenture dated as of March 22, 2010. The aggregate net proceeds from the issuances were
approximately $2.67 billion after deducting initial purchasers discounts and estimated
offering expenses. The notes are due in full on their scheduled maturity dates. The notes are
not subject to redemption prior to their stated maturity and there are no sinking fund
requirements. In connection with the note issuances, we entered into registration rights
agreements obligating us to, among other things, complete a registered exchange offer to
exchange the notes of each series for new registered notes of such series with substantially
identical terms, or register the notes pursuant to a shelf registration statement.
If (i) the registration statement for the exchange offer is not declared effective by the
SEC by January 26, 2011, or ceases to be effective during the required effectiveness period;
(ii) we are unable to consummate the exchange offer by March 22, 2011; or (iii) if applicable,
the shelf registration statement has not been declared effective or ceases to be effective
during the required effectiveness period, the annual interest rate on affected notes will
increase by 0.25% per year for the first 90-day period during which such registration default
continues. The annual interest rate on such notes will increase by an additional 0.25% per year
for each subsequent 90-day period during which such registration default continues, up to a
maximum additional rate of 0.50% per year. If the registration default is cured, the applicable
interest rate will revert to the original level.
The indenture governing the notes contains customary covenants that, among other things,
restrict our, and our restricted subsidiaries, ability to (i) incur liens on assets; (ii)
declare or pay dividends or acquire or retire shares of our capital stock during certain events
of default; (iii) designate restricted subsidiaries as non-restricted subsidiaries or designate
non-restricted subsidiaries; (iv) make investments in or transfer assets to non-restricted
subsidiaries; and (v) consolidate, merge, sell, or otherwise dispose of all or substantially
all of our assets.
Unsecured Bank Debt
Revolving Credit Facility: We have a $2.0 billion unsecured revolving credit facility,
entered into with an original group of 35 banks, expiring in October 2010. This revolving
credit facility provides for interest
rates that vary according to the pricing option selected at the time of borrowing. Pricing
options include a base rate, a rate ranging from 0.25% over LIBOR to 0.65% over LIBOR based
upon utilization, or a rate determined by a competitive bid process with the banks. The credit
facility is subject to facility fees, currently 0.2% of amounts available. We are currently
paying the maximum fees under the facility. The fees are based on our current credit ratings
and may decrease in the event of an upgrade to our ratings. As of June 30, 2010, the maximum
amount available of $2.0 billion under our unsecured revolving credit facility was outstanding
and interest was accruing at 0.90%.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
On April 16, 2010, we entered into an amendment to our revolving credit facility expiring
in October 2010. The amendment permits, among other things, liens securing (i) the loans under
the revolving credit facility originally expiring in October 2011 and (ii) certain other funded
term loans in an aggregate principal amount not to exceed $500 million. The amendment also
permits certain additional secured indebtedness in excess of the credit facilitys permitted
secured indebtedness basket of 12.5% of Consolidated Tangible Net Assets (as defined in the
credit agreement), provided we use any net cash proceeds from such additional secured
indebtedness to prepay the obligations under the revolving credit facility expiring in October
2010 and one of our term loans maturing in 2011.
In addition, $345 million of the outstanding loans under our revolving credit facility
originally expiring in October 2011, held by lenders not party to the amendment to that
facility, remain unsecured and will mature on their originally scheduled maturity date in
October 2011. See Secured Bank Debt above.
Term Loans: From time to time, we enter into funded bank financing arrangements. As of
June 30, 2010, approximately $119 million was outstanding under these term loan agreements,
with varying maturities through December 2011. The interest rates are based on LIBOR with
spreads ranging from 0.3% to 1.8%. At June 30, 2010, the interest rates ranged from 0.61% to
2.34%. In April 2010, we prepaid $410 million of our term loans with original maturity dates in
2011 and 2012. We also amended two of our remaining term loans to allow additional liens in
excess of our bank facilities permitted secured indebtedness basket of 12.5% of Consolidated
Tangible Net Assets, in certain cases subject to prepayment requirements similar to the
requirements described above for our revolving credit facility due October 2010. See Unsecured
Bank DebtRevolving Credit Facility above. In connection with such amendments, we increased
the interest rate spread on our $75 million term loan maturing in December 2011 by 1.5%.
Subordinated Debt
In December 2005, we issued two tranches of subordinated debt totaling $1.0 billion. Both
tranches mature on December 21, 2065, but each tranche has a different call option. The $600
million tranche has a call option date of December 21, 2010, and the $400 million tranche has a
call option date of December 21, 2015. The tranche with the 2010 call option date has a fixed
interest rate of 5.90% for the first five years, and the tranche with the 2015 call option date
has a fixed interest rate of 6.25% for the first ten years. Each tranche has an interest rate
adjustment if the call option for that tranche is not exercised. The new interest rate would be
a floating rate, reset quarterly, based on the initial credit spread of 1.55% and 1.80%,
respectively, plus the highest of (i) 3 month LIBOR; (ii) 10-year constant maturity treasury;
and (iii) 30-year constant maturity treasury.
G. | Derivative Activities |
We use derivatives to manage exposures to interest rate and foreign currency risks. At
June 30, 2010, we had interest rate and foreign currency swap agreements with a related
counterparty and interest rate cap agreements with an unrelated counterparty.
We record changes in fair value of derivatives in income or OCI depending on the
designation of the hedge as either a fair value hedge or cash flow hedge, respectively. Where
hedge accounting is not achieved,
the change in fair value of the derivative is recorded in income. In the case of a
re-designation of a derivative contract, the balance accumulated in AOCI at the time of the
re-designation is amortized into income over the remaining life of the underlying derivative.
Our foreign currency swap agreements mature through 2011, our interest rate swap agreements
mature through 2015, and our interest rate cap agreements mature in 2018.
During the second quarter of 2009, we entered into two interest rate cap agreements with
an unrelated counterparty in connection with a secured financing transaction. We have not
designated the interest rate caps as hedges, and all changes in fair value are recorded in
income.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
All of our interest rate and foreign currency swap agreements are subject to a master
netting agreement, which would allow the netting of derivative assets and liabilities in the
case of default under any one contract. Our derivative portfolio is recorded at fair value on
our balance sheet on a net basis in Derivative liabilities, net (see Note H Fair Value
Measurements). We account for all of our interest rate swap and foreign currency swap
agreements as cash flow hedges. We do not have any credit risk related contingent features and
are not required to post collateral under any of our existing derivative contracts.
Derivatives have notional amounts, which generally represent amounts used to calculate
contractual cash flows to be exchanged under the contract. The following table presents
notional and fair values of derivatives outstanding at the following dates:
Asset Derivatives | Liability Derivatives | |||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||
USD | USD | |||||||||||||||
(In thousands) | ||||||||||||||||
June 30, 2010: |
||||||||||||||||
Derivatives designated as hedging
instruments: |
||||||||||||||||
Interest rate swap agreements (a) |
$ | | $ | | $ | 698,115 | $ | (48,941 | ) | |||||||
Foreign exchange swap agreements |
| | | 1,600,000 | (21,890 | ) | ||||||||||
Total derivatives designated as
hedging instruments |
$ | | $ | (70,831 | ) | |||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||
Interest rate cap agreements |
$ | 95,117 | $ | 1,651 | $ | | $ | | ||||||||
Total derivatives |
$ | 1,651 | $ | (70,831 | ) | |||||||||||
December 31, 2009: |
||||||||||||||||
Derivatives designated as hedging
instruments: |
||||||||||||||||
Interest rate swap agreements (a) |
$ | | $ | | $ | 1,070,513 | $ | (66,916 | ) | |||||||
Foreign exchange swap agreements |
| 1,600,000 | 254,261 | 14,191 | (574 | ) | ||||||||||
Total derivatives designated as
hedging instruments |
$ | 254,261 | $ | (67,490 | ) | |||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||
Interest rate cap agreements |
$ | 100,631 | $ | 4,086 | $ | | $ | (67,490 | ) | |||||||
$ | 258,347 | $ | (67,490 | ) | ||||||||||||
(a) | Converts floating interest rate debt into fixed rate debt. |
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
During the three and six months ended June 30, 2010 and 2009, we recorded the
following in OCI related to derivative instruments:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Gain (Loss) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Effective portion of change in fair market value of derivatives (a)(b) |
$ | (166,030 | ) | $ | 141,084 | $ | (221,234 | ) | $ | 52,247 | ||||||
Amortization of balances of de-designated hedges and other adjustments |
1,040 | (122 | ) | 1,292 | (243 | ) | ||||||||||
Foreign exchange component of cross currency swaps charged (credited) to
income |
203,520 | (184,460 | ) | 334,720 | (67,570 | ) | ||||||||||
Income tax effect |
(13,485 | ) | 15,224 | (40,172 | ) | 5,448 | ||||||||||
Net changes in cash flow hedges, net of taxes |
$ | 25,045 | $ | (28,274 | ) | $ | 74,606 | $ | (10,118 | ) | ||||||
(a) | Includes $25,208 and $47,195 and $(62,620) and $(60,407) of combined CVA and MVA for the three and six month periods ended June 30, 2010 and 2009, respectively. | |
(b) | 2010 includes losses of $(15,409) on a derivative contract that matured during the six months ended June 30, 2010, that was de-designated as a cash flow hedge and then subsequently re-designated during the life of the contract. |
The following table presents the effective portion of the unrealized gain (loss) on
derivative positions recorded in OCI:
Amount of Unrealized Gain or (Loss) | ||||||||||||||||
Recorded in OCI on Derivatives | ||||||||||||||||
(Effective Portion) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Derivatives Designated as Cash Flow Hedges | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest rate swap agreements |
$ | 4,836 | $ | 23,087 | $ | (4,582 | ) | $ | 20,003 | |||||||
Foreign exchange swap agreements |
(198,011 | ) | 98,620 | (271,080 | ) | (543 | ) | |||||||||
Total (a) |
$ | (193,175 | ) | $ | 121,707 | $ | (275,662 | ) | $ | 19,460 | ||||||
(a) | Includes $25,208 and $47,195 and $(62,620) and $(60,407) of combined CVA and MVA for the three and six month periods ended June 30, 2010 and 2009, respectively. |
The following table presents amounts reclassified from AOCI into income when cash payments
were made or received on our qualifying cash flow hedges:
Amount of Gain or (Loss) Reclassified from | ||||||||||||||||
AOCI Into Income | ||||||||||||||||
(Effective Portion) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
Location of Gain or (Loss) Reclassified from AOCI | June 30, | June 30, | ||||||||||||||
into Income (Effective Portion) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Interest rate swap agreements interest expense |
$ | (8,128 | ) | $ | 4,688 | $ | (16,915 | ) | $ | (15,981 | ) | |||||
Foreign exchange swap agreements interest expense |
(19,017 | ) | (24,382 | ) | (37,289 | ) | (18,286 | ) | ||||||||
Foreign exchange swap agreements lease revenue |
| 317 | (224 | ) | 1,480 | |||||||||||
Total |
$ | (27,145 | ) | $ | (19,377 | ) | $ | (54,428 | ) | $ | (32,787 | ) | ||||
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
We estimate that within the next twelve months, we will amortize into earnings
approximately $182.6 million of the pre-tax balance in AOCI under cash flow hedge accounting in
connection with our program to convert debt from floating to fixed interest rates.
The following table presents the effect of derivatives recorded in the Condensed,
Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009:
Amount of Gain or (Loss) Recognized | ||||||||||||||||
in Income on Derivatives | ||||||||||||||||
(Ineffective Portion) (a) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Derivatives Designated as Cash Flow Hedges: |
||||||||||||||||
Interest rate swap agreements |
$ | (32 | ) | $ | (195 | ) | $ | (91 | ) | $ | (390 | ) | ||||
Foreign exchange swap agreements agreements |
(2,338 | ) | 7,214 | (25,629 | ) | 5,174 | ||||||||||
Total |
(2,370 | ) | 7,019 | (25,720 | ) | 4,784 | ||||||||||
Derivatives Not Designated as a Hedge: |
||||||||||||||||
Interest rate cap agreements (b) |
(1,373 | ) | (700 | ) | (2,428 | ) | (700 | ) | ||||||||
Reconciliation to Condensed, Consolidated Statements of Income: |
||||||||||||||||
Income effect of maturing derivative contracts |
| | (15,409 | ) | | |||||||||||
Reclassification of amounts de-designated as hedges recorded in AOCI |
(1,040 | ) | 122 | (1,292 | ) | 243 | ||||||||||
Effect from derivatives, net of change in hedged items due to
changes in foreign exchange rates |
$ | (4,783 | ) | $ | 6,441 | $ | (44,849 | ) | $ | 4,327 | ||||||
(a) | All components of each derivatives gain or loss were included in the assessment of effectiveness. | |
(b) | An additional $0.8 million of amortization of premium paid to the derivative counterparty was recognized in Interest expense during the three months ended June 30, 2009. |
H. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement
date. The degree of judgment used in measuring the fair value of financial instruments
generally correlates with the level of pricing observability. Assets and liabilities recorded
at fair value on our Condensed, Consolidated Balance Sheets are measured and classified in a
hierarchy for disclosure purposes consisting of three levels based on the observability of
inputs available in the marketplace used to measure the fair value. Level 1 refers to fair
values determined based on quoted prices in active markets for identical assets; Level 2 refers
to fair values estimated using significant other observable inputs; and Level 3 refers to fair
values estimated using significant non-observable inputs.
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a
recurring basis as of June 30, 2010 and December 31, 2009, categorized using the fair value
hierarchy described above.
Counterparty | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting (a) | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
June 30, 2010: |
||||||||||||||||||||
Derivative assets |
$ | | $ | 1,651 | $ | | $ | | $ | 1,651 | ||||||||||
Derivative liabilities |
| (70,831 | )(b) | | | (70,831 | ) | |||||||||||||
Total |
$ | | $ | (69,180 | ) | $ | | $ | | $ | (69,180 | ) | ||||||||
December 31, 2009: |
||||||||||||||||||||
Derivative assets |
$ | | $ | 258,347 | (b) | $ | | $ | (67,490 | ) | $ | 190,857 | ||||||||
Derivative liabilities |
| (67,490 | ) | | 67,490 | | ||||||||||||||
Total |
$ | | $ | 190,857 | $ | | $ | | $ | 190,857 | ||||||||||
(a) | As permitted under GAAP, we have elected to offset derivative assets and derivative liabilities under our master netting agreement. | |
(b) | The balance includes CVA and MVA aggregating $(23.4) million and $24.2 million at June 30, 2010 and December 31, 2009, respectively. |
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The fair value of an aircraft is classified as a Level 3 valuation. The unobservable
inputs utilized in the calculation are described in our policy in Note N of Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December
31, 2009.
We measure the fair value of aircraft and certain other assets on a non-recurring basis,
generally quarterly, annually, or when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. During the three months ended June 30,
2010, we recorded impairment charges of $60.6 million related to eight aircraft. The fair value
for these aircraft was based upon recoverability assessments performed, in which it was
determined that the carrying amount of the aircraft was not fully recoverable. Six of these
aircraft are classified as Flight equipment held for sale, one aircraft is classified in Flight
equipment under operating leases, and one aircraft is designated for part-out and was recorded
in Lease receivables and other assets on our June 30, 2010, Condensed, Consolidated
Balance Sheet. We also recorded a $3.5 million impairment charge to record spare parts
inventory at its fair value.
During the three months ended March 31, 2010, we performed recoverability assessments in
conjunction with sales of aircraft and determined that 52 aircraft were not fully recoverable.
Based upon a fair value analysis, we deemed these aircraft to be impaired and recorded charges
of $351.8 million to record the aircraft to their fair value. Of the 52 aircraft that were
impaired, we sold three during the three months ended June 30, 2010, and the remaining 49 were
classified as Flight equipment held for sale as of June 30, 2010.
Aggregate impairment charges recorded on 61 aircraft for the six months ended June 30,
2010, were $412.4 million. See Note C Flight Equipment Marketing for more information.
During the six months ended June 30, 2009, we recorded a $7.5 million impairment charge to
record an aircraft classified as Flight equipment held for sale to its fair value. The aircraft
was sold in the third quarter of 2009.
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Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
I. | Fair Value Disclosures of Financial Instruments |
We used the following methods and assumptions in estimating
our fair value disclosures for
financial instruments:
Cash, Including Restricted Cash: The carrying value reported on the balance sheet for cash
and cash equivalents approximates its fair value.
Notes Receivable: The fair values for notes receivable are estimated using discounted cash
flow analyses, using market derived discount rates.
Debt Financing: Quoted market prices are used where available. The following assumptions
were made when estimating the fair value of our debt financings:
Long-term fixed rate debt: Cash flows are discounted using relevant swap zero
curves and credit default swap spreads were used to incorporate cost of credit risk
protection.
Floating rate non-ECA debt: Cash flows are estimated using current forward
rates. The cash flows are discounted using current swap zero curves and credit default
swap spreads were used to incorporate cost of credit risk protection.
ECA debt: Cash flows are estimated using current forward rates. The cash
flows are discounted using current swap zero curves and include adjustments for cost of
credit risk protection to reflect guarantees by the European ECAs, implying a AAA-rated
government guarantee on the debt.
Junior subordinated debt: Quoted market prices were used to value the junior
subordinated debt.
Derivatives: Fair values were based on the use of AIG valuation models that utilize, among
other things, current interest, foreign exchange and volatility rates, as applicable.
Guarantees: For guarantees entered into after December 31, 2002, we record the fee paid to
us as the initial carrying value of the guarantees which are included in Accrued interest and
other payables on our Consolidated Balance Sheets. The fee received is recognized ratably over
the guarantee period. Included in the fair value balance below are two loan guarantees entered
into prior to December 31, 2002, which are not included in the balance on our Condensed,
Consolidated Balance Sheets. Fair value for these guarantees is approximately equal to total
unamortized fees.
The carrying amounts and fair values of the Companys financial instruments at June 30,
2010 and December 31, 2009, are as follows:
June 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount of | Fair Value | Amount of | Fair Value | |||||||||||||
Asset | of Asset | Asset | of Asset | |||||||||||||
(Liability) | (Liability) | (Liability) | (Liability) | |||||||||||||
Dollars in thousands) | ||||||||||||||||
Cash, including restricted cash |
$ | 3,853,215 | $ | 3,853,215 | $ | 652,067 | $ | 652,067 | ||||||||
Notes receivable |
97,526 | 99,375 | 112,060 | 107,063 | ||||||||||||
Debt financing (including loans from
AIG Funding, subordinated debt and
foreign currency adjustment,
excluding debt discount) |
(31,545,822 | ) | (30,225,767 | ) | (30,112,395 | ) | (26,762,955 | ) | ||||||||
Derivative (liabilities) assets |
(69,180 | ) | (69,180 | ) | 190,857 | 190,857 | ||||||||||
Guarantees |
(12,908 | ) | (14,739 | ) | (10,860 | ) | (12,886 | ) |
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Table of Contents
INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
J. | Related Party Transactions |
We are party to cost and tax sharing agreements with AIG. Generally, these agreements
provide for the allocation of corporate costs based upon a proportional allocation of costs to
all subsidiaries. We also pay other subsidiaries of AIG a fee related to management services
provided for certain of our foreign subsidiaries. We earned management fees from two trusts
consolidated by AIG for the management of aircraft we sold to the trusts in prior years. During
the six months ended June 30, 2010, we paid AIG $85.0 million that was due and payable on a
loan related to certain tax planning activities we had participated in during 2002 and 2003.
We borrowed $1.7 billion from AIG Funding, an affiliate of our parent, in March 2009 to
assist in funding our liquidity needs. In the fourth quarter of 2009, we borrowed an additional
$2.2 billion from AIG Funding and amended and restated the existing borrowings of $1.7 billion.
A portion of the interest due on these loans may be payable-in-kind and added to the principal
amount. See Note F Debt Financings.
All of our interest rate swap and foreign currency swap agreements are with AIGFP, a
related party. See Note H Fair Value Measurements and Note G Derivative Activities. In
addition, we purchase insurance through a broker who may place part of our policies with AIG.
Total insurance premiums were $3.5 million and $3.2 million for the six-month periods ended
June 30, 2010 and 2009, respectively.
Our financial statements include the following amounts involving related parties:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
Income Statement | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Expense (income): |
||||||||||||||||
Interest expense on loans from AIG Funding |
$ | 62,035 | $ | 28,420 | $ | 122,545 | $ | 31,593 | ||||||||
Effect from derivatives on contracts with AIGFP |
(3,410 | ) | 7,141 | (42,421 | ) | 5,027 | ||||||||||
Interest on derivative contracts with AIGFP |
27,144 | 19,695 | 54,203 | 34,268 | ||||||||||||
Lease revenue related to hedging of lease receipts
with AIGFP |
| (318 | ) | 224 | (1,480 | ) | ||||||||||
Allocation of corporate costs from AIG |
1,617 | 3,221 | 5,877 | 3,497 | ||||||||||||
Management fees received |
(2,387 | ) | (2,367 | ) | (4,685 | ) | (4,660 | ) | ||||||||
Management fees paid to subsidiaries of AIG |
114 | 257 | 354 | 437 |
June 30, | December 31, | |||||||
Balance Sheet | 2010 | 2009 | ||||||
(Dollars in thousands) | ||||||||
Asset (liability): |
||||||||
Loans payable to AIG Funding |
$ | (3,938,487 | ) | $ | (3,909,567 | ) | ||
Derivative (liabilities) assets, net |
(70,831 | ) | 186,771 | |||||
Income taxes payable to AIG |
(85,592 | ) | (80,924 | ) | ||||
Taxes benefit sharing payable to AIG |
| (85,000 | ) | |||||
Accrued corporate costs payable to AIG |
(5,418 | ) | (5,298 | ) | ||||
Accrued interest payable to AIG |
(708 | ) | (672 | ) |
K. | Commitments and Contingencies |
Guarantees
| Asset Value Guarantees: We have guaranteed a portion of the residual value of 22 aircraft to financial institutions and other unrelated third parties for a fee. These guarantees expire at various dates through 2023 and generally obligate us to pay the shortfall between the fair market value and the guaranteed value of the aircraft and provide us with an option to purchase the aircraft for the |
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
guaranteed value. At June 30, 2010, the maximum commitment that we would be obligated to pay under such guarantees, without any offset for the projected value of the aircraft, was approximately $530 million. | |||
| Aircraft Loan Guarantees: We have guaranteed two loans collateralized by aircraft to financial institutions for a fee. The guarantees expire in 2014, when the loans mature, and obligate us to pay an amount up to the guaranteed value upon the default of the borrower, which may be offset by a portion of the underlying value of the aircraft collateral. At June 30, 2010, the guaranteed value, without any offset for the projected value of the aircraft, was approximately $25 million. |
Management regularly reviews the underlying values of the aircraft collateral to determine
our exposure under these guarantees. We were recently called upon to perform under an asset
value guarantee and purchased an aircraft for approximately $4 million. The next strike date
for asset value guarantees is in 2011. If called upon to perform under the contracts, we would
purchase three aircraft for approximately $27.8 million. We do not currently anticipate that we
will be required to perform under any of the three guarantees based upon the underlying values
of the aircraft collateralized.
In addition, in October 2009, we entered into guarantee agreements to guarantee the
repayment of AIGs obligations under the FRBNY Credit Agreement up to an amount equal to the
aggregate outstanding balance of our borrowings from AIG Funding. See Note F Debt
Financings.
Legal Contingencies
| Flash Airlines: We are named in lawsuits in connection with the January 3, 2004, crash of our Boeing 737-300 aircraft on lease to Flash Airlines, an Egyptian carrier. These lawsuits were filed by the families of victims on the flight and seek unspecified damages for wrongful death, costs and fees. The initial lawsuit was filed in May 2004 in California, and subsequent lawsuits were filed in California and Arkansas. All cases filed in the U.S. were dismissed on the grounds of forum non conveniens and transferred to the French Tribunal de Grande Instance civil court in either Bobigny or Paris. The Bobigny plaintiffs challenged French jurisdiction, whereupon the French civil court decided to retain jurisdiction. On appeal the Paris Court of Appeal reversed, and on appeal the French Cour de Cassation elected to defer its decision pending a trial on the merits. We believe we are adequately covered in these cases by the liability insurance policies carried by Flash Airlines and we have substantial defenses to these actions. We do not believe that the outcome of these lawsuits will have a material effect on our consolidated financial condition, results of operations or cash flows. | ||
| Krasnoyarsk Airlines: We leased a 757-200ER aircraft to a Russian airline, KrasAir, which is now the subject of a Russian bankruptcy-like proceeding. The aircraft lease was assigned to another Russian carrier, Air Company Atlant-Soyuz Incorporated, which defaulted under the lease. The aircraft has been detained by the Russian customs authorities on the basis of certain alleged violations of the Russian customs code by KrasAir. While we have prevailed in court proceedings, Russian custom authorities will not provide relevant documents to permit the aircraft to be removed from Russia. We are now pursuing alternative options to resolve the situation and, as such, have performed a recoverability assessment of the fair value of the aircraft. The aircraft was deemed to be impaired and we recorded an $8.1 million impairment charge to Selling, general and administrative expenses in the three months ended June 30, 2010. The aircraft had a net book value of $19.8 million at June 30, 2010. We cannot predict what the outcome of this matter will be, but we do not believe that it will be material to our consolidated financial position, results of operations or cash flows. | ||
| Estate of Volare Airlines: In November 2004, Volare, an Italian airline, filed for bankruptcy in Italy. Prior to Volares bankruptcy, we leased to Volare, through wholly-owned subsidiaries, two A320-200 aircraft and four A330-200 aircraft. In addition, we managed the lease to Volare by an |
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
entity that is a related party to us of one A330-200 aircraft. In October 2009, the Volare bankruptcy receiver filed a claim in an Italian court in the amount of 29.6 million against us and our related party for the return to the Volare estate of all payments made by it to us and our related party in the year prior to Volares bankruptcy filing. We have engaged Italian counsel to represent us and intend to defend this matter vigorously. We cannot predict the outcome of this matter, but we do not believe that it will be material to our consolidated financial position, results of operations or cash flows. |
We are also a party to various claims and litigation matters arising in the ordinary
course of our business. We do not believe the outcome of any of these matters will be material
to our consolidated financial position, results of operations or cash flows.
L. | Variable Interest Entities |
Our leasing and financing activities require us to use many forms of entities to achieve
our business objectives and we have participated to varying degrees in the design and formation
of these entities. Our involvement in VIEs varies from being a passive investor with
involvement from other parties, to managing and structuring all the activities of the entity,
or to being the sole shareholder and sole variable interest holder of the entity. Based on a
new accounting standard described below, we only consolidate the results of VIEs for which we
(i) control the activities that significantly impact the economic performance of the entity and
(ii) have an obligation to absorb the losses of the entity or a right to receive benefits from
the entity. Also see Note F Debt Financings for more information on entities created for the
purpose of obtaining financing.
Investment Activities
We have variable interests in ten entities to which we previously sold aircraft. The
interests include debt financings, preferential equity interests and, in some cases, providing
guarantees to banks which had provided the secured senior financings to the entities. Each
entity owns one aircraft. The individual financing agreements are cross-collateralized by the
aircraft. In prior years, we had determined that we were the primary beneficiary of these
entities due to our exposure to the majority of the risks and rewards of these entities and
consolidated the entities into our condensed, consolidated financial statements. Because we did
not have legal or operational control over, and did not own the assets of, nor were we directly
obligated for the liabilities of these entities, we presented the assets and liabilities of the
entities separately on our Condensed, Consolidated Balance Sheet at December 31, 2009. Assets
in the amount of $79.7 million and liabilities in the amount of $6.5 million are included in
our Condensed, Consolidated Balance Sheet at December 31, 2009, and net expense of $1.0 million
is included in our Condensed, Consolidated Statement of Income for the period ended June 30,
2009.
On January 1, 2010, we adopted a new accounting standard that amended the rules addressing
consolidation of VIEs with an approach focused on identifying which enterprise has the power to
direct the activities of a VIE that most significantly affect the entitys economic performance
and has (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits
from the entity. Upon adopting the standard, we determined that the ten entities discussed
above should be deconsolidated, because we do not control the activities which significantly
impact the economic performance of the entities. Accordingly, we removed assets of $79.7
million and liabilities of $6.5 million. In addition, we recorded investments in senior secured
notes of $51.7 million and guarantee liabilities of $3.0 million, and we charged our beginning
retained earnings of $15.9 million, net of tax, on January 1, 2010, related to our involvement
with these entities.
Non-Recourse Financing Structures
We continue to consolidate one entity in which ILFC has a variable interest that was
established to obtain secured financing for the purchase of an aircraft. ILFC provided $39.0
million of subordinated financing to the entity and the entity borrowed $106.0 million from
third parties, $82.0 million of which is non-recourse to ILFC. The entity owns one aircraft
with a net book value of $139.6 million at June 30, 2010. We have determined that we are the
primary beneficiary of this entity because we control and manage all aspects of this
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
entity,
including directing the activities that most significantly affect the entitys economic
performance, and we absorb the majority of the risks and rewards of this entity.
We also consolidate a wholly-owned subsidiary we created for the purpose of obtaining
secured financing for an aircraft. The entity meets the definition of a VIE because it does not
have sufficient equity to operate without ILFCs subordinated financial support in the form of
intercompany notes, which serve as equity even though they are legally debt instruments. This
entity borrowed $55.4 million from a third party. The loan is non-recourse to ILFC and is
secured by the aircraft and the lease receivables. The entity owns one aircraft with a net book
value of $92.9 million at June 30, 2010. We have determined that we are the primary beneficiary
of this entity because we control and manage all aspects of this entity, including directing
the activities that most significantly affect the entitys economic performance, and we absorb
the majority of the risks and rewards of this entity.
Wholly-Owned ECA Financing Vehicles
We have created certain wholly-owned subsidiaries for the purpose of purchasing aircraft
and obtaining financing secured by such aircraft. The secured debt is guaranteed by the
European ECAs. The entities meet the definition of a VIE because they do not have sufficient
equity to operate without ILFCs subordinated financial support in the form of intercompany
notes, which serve as equity even though they are legally debt instruments. We control and
manage all aspects of these entities and guarantee the activities of these entities and they
are therefore consolidated into our condensed, consolidated financial statements.
Other Secured Financings
We have created a number of wholly-owned subsidiaries for the purpose of obtaining secured
financings. The entities meet the definition of a VIE because they do not have sufficient
equity to operate without ILFCs subordinated financial support in the form of intercompany
notes, which serve as equity even though they are legally debt instruments. One of the entities
borrowed $550 million from third parties and a portfolio of 37 aircraft will be transferred
from ILFC to the subsidiaries of the entity to secure the loan. We control and manage all
aspects of these entities and guarantee the activities of these entities and they are therefore
consolidated into our condensed, consolidated financial statements. See Note F Debt
Financings for more information on these financings.
Wholly-Owned Leasing Entities
We have created wholly-owned subsidiaries for the purpose of facilitating aircraft leases
with airlines. The entities meet the definition of a VIE because they do not have sufficient
equity to operate without ILFCs subordinated financial support in the form of intercompany
notes, which serve as equity even though they are legally debt instruments. We control and
manage all aspects of these entities and guarantee the activities of these entities and they
are therefore consolidated into our condensed, consolidated financial statements.
M. | Subsequent Events |
On July 6, 2010, we signed an agreement to sell six aircraft to a third party for an
aggregate purchase price of approximately $299 million. As of June 30, 2010, the six aircraft
met the criteria to be recorded as Flight equipment held for sale and we recorded impairment
charges aggregating $40.1 million and lease charges aggregating $5.9 million related to the six
aircraft for the three months ended June 30, 2010. As the impairment charges were in
anticipation of the ultimate sale of the aircraft, the impairment charge and related lease
charges were charged to Flight equipment marketing in the period ended June 30, 2010. The
aggregate net book value of the six aircraft was approximately $290.7 million at June 30, 2010,
after recording the impairment charges, and is included in Flight equipment held for sale on
our June 30, 2010, Condensed, Consolidated Balance Sheet. Net cash proceeds from the sale will
be transferred as the individual aircraft sales are consummated. The actual aggregate loss may
differ from the impairment charge recorded depending on the timing of the completion of the
sales of the aircraft.
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NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2010
(Unaudited)
On July 28, 2010, an aircraft owned by one of our non-restricted subsidiaries was involved
in an accident that will likely result in a total loss of the aircraft. We believe that we have
adequate insurance coverage and do not expect that this event will be material to our financial
condition or results of operations.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statement Regarding Forward-looking Information
This quarterly report on Form 10-Q and other publicly available documents may contain or
incorporate statements that constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this
Form 10-Q and include statements regarding, among other matters, the potential sale of us by our
parent, AIG, the state of the airline industry, our access to the capital markets, our ability to
restructure leases and repossess aircraft, the structure of our leases, regulatory matters
pertaining to compliance with governmental regulations and other factors affecting our financial
condition or results of operations. Words such as expects, anticipates, intends, plans,
believes, seeks, estimates and should, and variations of these words and similar
expressions, are used in many cases to identify these forward-looking statements. Any such
forward-looking statements are not guarantees of future performance and involve risks,
uncertainties and other factors that may cause our actual results, performance or achievements, or
industry results to vary materially from our future results, performance or achievements, or those
of our industry, expressed or implied in such forward-looking statements. Such factors include,
among others, general industry, economic and business conditions, which will, among other things,
affect demand for aircraft, availability and creditworthiness of current and prospective lessees,
lease rates, availability and cost of financing and operating expenses, governmental actions and
initiatives, and environmental and safety requirements, as well as the factors discussed under
Part II Item 1A. Risk Factors, in this Form 10-Q. We do not intend and undertake no obligation
to update any forward-looking information to reflect actual results or future events or
circumstances.
Overview
ILFCs primary business operation is to acquire new commercial jet aircraft from aircraft
manufacturers and other parties and lease those aircraft to airlines throughout the world. We also
provide management services to investors and/or owners of aircraft portfolios for a management fee.
In addition to our leasing activities, we sell aircraft from our leased aircraft fleet to other
leasing companies, financial services companies and airlines. We have also provided asset value
guarantees and a limited number of loan guarantees to buyers of aircraft, or to financial
institutions, for a fee. Additionally, we remarket and sell aircraft owned, or managed, by others
for a fee.
Starting in the third quarter of 2008, worldwide economic conditions began to deteriorate
significantly. The decline in economic conditions resulted in highly volatile markets, a steep
decline in equity markets, less liquidity, the widening of credit spreads and several prominent
financial institutions seeking governmental aid. In the first half of 2010, we began to see an
improvement in these conditions and regained access to the debt markets.
Operating Results
We reported net income of approximately $110.8 million and $47.8 million for the three- and
six-month periods ended June 30, 2010, respectively. Our income before income taxes decreased
approximately $190.0 million and $603.5 million for the three- and six-month periods ended June 30,
2010, respectively, compared to the same periods in 2009. The decreases are primarily due to (i)
impairment and other lease related charges taken on aircraft we have agreed to sell to generate
liquidity to repay maturing debt obligations and (ii) increasing costs of borrowing.
Since March 31, 2010, we signed agreements to sell two aircraft portfolios aggregating 59
aircraft. We reclassified 56 of the 59 aircraft from Flight equipment under operating leases into
Flight equipment held for sale and completed the sale of one of those aircraft during the three
months ended June 30, 2010. Due to current market conditions, we recorded impairment charges on the
aircraft sold or classified as Flight equipment held for sale, and lease related charges on some of
those aircraft, during the six months ended June 30, 2010. As part of our normal recurring fleet
assessment, we also completed the sale of two aircraft and designated one aircraft for part-out.
Additional impairment charges were recorded related to those aircraft and on one other aircraft as
part of our normal recurring assessment.
We expect most of the sales of the aircraft classified as Flight equipment held for sale to be
consummated during the remainder of 2010. The remaining 55 aircraft we have contracted to sell will
generate aggregate gross proceeds of approximately $2.1 billion. The 56 aircraft reclassified to
Flight equipment held for sale generated
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aggregate quarterly lease revenue of approximately $70 million and the quarterly depreciation
aggregated approximately $23 million.
The reclassification of the aircraft from our lease fleet had the following additional impact
on our operating income during the following periods:
Three Months Ended | Six Months Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
(Dollars in millions) | ||||||||
Impairment charges taken
on aircraft |
$ | 53.0 | $ | 404.3 | ||||
Lease related charges |
5.2 | 89.2 |
Our cost of borrowing is increasing as we refinance our existing debt with new financing
arrangements, reflecting relatively higher interest rates due to our current long-term debt
ratings. Our average composite interest rate for the three- and six-month periods ended June 30,
2010, increased 0.57% and 0.33%, respectively, compared to the same periods in 2009. Our average
debt outstanding remained relatively constant over the three-month periods ended June 30, 2010 and
2009, and decreased slightly for the six months ended June 2010 as compared to the same period in
2009. We had cash and restricted cash aggregating $3.9 billion at June 30, 2010. If we were to pay
down the principal balance of certain outstanding indebtedness using the unrestricted cash of
approximately $3 billion, our interest expense would decrease by approximately $37 million per
quarter, using our average composite interest rate for the three months ended June 30, 2010.
Additionally, our estimated future overhaul reimbursements increased during 2010 and we
recorded additional charges to Provision for overhauls of $42.6 million and $56.7 million in the
three and six months ended June 30, 2010, respectively, to reflect the increase. As our average
fleet ages, we anticipate that estimated future overhaul reimbursements will increase as well.
Our Fleet
During the six months ended June 30 2010, we had the following activity related to Flight
equipment under operating leases:
Number of Aircraft | ||||
Flight equipment under operating leases at December 31, 2009 |
993 | |||
Aircraft reclassified from Net investment in finance and
sales-type leases |
7 | |||
Aircraft purchases |
5 | |||
Aircraft sold |
(2 | ) | ||
Aircraft transferred to Flight equipment held for sale |
(56 | ) | ||
Aircraft designated for part-out |
(1 | ) | ||
Flight equipment under operating leases at June 30, 2010 |
946 | |||
As of June 30, 2010, we owned 946 aircraft in our leased fleet, had four additional
aircraft in the fleet classified as finance and sales-type leases, and provided fleet management
services for 99 aircraft. We have contracted with Airbus and Boeing to buy 115 new aircraft for
delivery through 2019 with an estimated purchase price of $13.5 billion, six of which are scheduled
to deliver during 2011. Currently we are also considering purchasing new aircraft from airlines and
leasing them back to the airlines. We anticipate financing the purchases in part by operating cash
flows and in part by incurring additional debt. We have not entered into any new purchase
agreements with manufacturers during 2010.
Of the 115 aircraft on order, 74 are 787s from Boeing with the first aircraft currently
scheduled to deliver in July 2012. The contracted delivery dates were originally scheduled from
January 2010 through 2017, but Boeing has experienced delays in the production of the 787s. We have
signed contracts for 29 of the 74 787s on order. The leases we have signed with our customers and
our purchase agreements with Boeing are both subject to cancellation
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clauses related to delays in delivery dates, though as of June 30, 2010, there have been no
cancellations by any party. We are in discussions with Boeing related to revisions to the delivery
schedule and potential delay compensation and penalties for which we may be eligible. Under the
terms of our 787 leases, particular lessees may be entitled to share in any compensation that we
receive from Boeing for late delivery of the aircraft.
Debt Financing
We have generally financed our aircraft purchases through available cash balances, internally
generated funds, including aircraft sales, and debt financings. During 2009, we were unable to
issue commercial paper or unsecured debt and relied primarily on loans from AIG Funding, an
affiliate of our parent, to fulfill our liquidity needs. During the six months ended June 30, 2010,
we regained access to the debt markets and issued approximately $4.4 billion of secured and
unsecured debt. The $4.4 billion included borrowing $326.8 million under our 2004 ECA facility to
finance five Airbus aircraft delivered during the second quarter of 2010 and re-finance five Airbus
aircraft purchased in 2009, entering into new secured financing transactions aggregating $1.3
billion, and issuing $2.75 billion aggregate principal amount of unsecured senior notes in private
placements. See Liquidity below.
Industry Condition and Sources of Revenue
Our revenues are principally derived from scheduled and charter airlines and companies
associated with the airline industry. We derive more than 90% of our revenues from airlines outside
of the United States. The airline industry is cyclical, economically sensitive, and highly
competitive. Airlines and related companies are affected by fuel prices and shortages, political or
economic instability, natural disasters, terrorist activities, changes in national policy,
competitive pressures, labor actions, pilot shortages, insurance costs, recessions, health concerns
and other political or economic events adversely affecting world or regional trading markets. Our
customers ability to react to and cope with the volatile competitive environment in which they
operate, as well as our own competitive environment, will affect our revenues and income.
In each of April and May 2010, European air space was closed to air traffic for a number of
days as a result of eruptions of an Icelandic volcano. The International Air Transport Association
has estimated lost revenue for the airline industry in excess of $1.7 billion during these periods.
The eruptions had no significant impact on our operating income for the three or six-month periods
ended June 30, 2010.
Recently, we have seen improvements in passenger and freight traffic, and we currently see our
customers increasingly willing to extend their existing leases. This is consistent with the
beginning of a financial recovery of the airline industry. However, we continue to see financial
stress to varying degrees across the airline industry largely precipitated by past volatility in
fuel costs, lower demand for air travel, tightening of the credit markets, and generally worsened
economic conditions. This financial stress has caused a slow-down in the airline industry. We
believe that the worst of this cyclical downturn has passed and that our business, and that of our
customers, will improve during the second half of 2010. Nevertheless, the negative impact on our
operating results through lower lease rates and increased costs associated with repossessing and
redeploying aircraft will continue through 2010 and 2011. In addition, lower lease rates could
possibly result in future aircraft impairment charges.
As a result of the above described financial stress on the airline industry, one of our
customers, Skyservice Airlines Inc. (Skyservice), operating one owned aircraft, ceased operations
on March 31, 2010. At June 30, 2010, we had leased the aircraft previously leased to Skyservice to
another airline. On August 2, 2010, one of our customers, Mexicana de Aviación (Mexicana),
operating 12 of our owned aircraft, of which eight are leased from us and four are subleased from
another one of our customers, filed for bankruptcy protection. At
August 6, 2010, the 12 aircraft remained in the possession of
Mexicana. We had
three aircraft in our fleet that were not subject to a signed lease agreement or a signed letter of
intent at June 30, 2010, two of which were subsequently leased.
We typically contract to re-lease aircraft before the end of the existing lease term. For
aircraft returned before the end of the lease term, we have generally been able to re-lease
aircraft within two to six months of their return. In
monitoring the aircraft in our fleet for impairment charges, we consider facts and
circumstances, including potential sales, that would require us to modify our assumptions used in
our recoverability assessments and prepare revised recoverability assessments as necessary.
Further, we identify those aircraft that are most susceptible to failing the
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
recoverability assessment and monitor those aircraft more closely, which may result in more frequent
recoverability assessments. The recoverability of these aircraft is more sensitive to changes in
contractual cash flows, future cash flow estimates and residual values. These aircraft are
typically older planes that are less in demand and have lower lease rates. As of June 30, 2010, we
had identified 15 aircraft as being susceptible to failing the recoverability test. These aircraft
had a net book value of $333.6 million at June 30, 2010. Management believes that the carrying
value of these aircraft is supported by the estimated future undiscounted cash flows expected to be
generated by each aircraft. As a result of our recurring recoverability analysis, we recorded an
$8.1 million impairment charge in Selling, general and administrative expenses on an aircraft that
remained in our leased fleet for the three and six months ended June 30, 2010. We recorded
impairment charges of $404.3 million in Flight equipment marketing for the six months ended June
30, 2010, including $359.3 million related to 56 aircraft reclassified as Flight equipment held for
sale during the period, as discussed above under Operating Results.
There are lags between changes in market conditions and their impact on our results, as
contracts signed during times of higher lease rates currently remain in effect. Therefore, the
current market conditions and their potential effect may not have yet been fully reflected in our
results. Additionally, management monitors all lessees that are behind in lease payments and
discusses relevant operational and financial issues facing the lessees with our marketing
executives in order to determine the amount of rental income to recognize for the past due amounts.
Lease payments are due in advance and we generally recognize rental income only to the extent we
have received payments or hold security deposits. At June 30, 2010, 14 customers operating 51
aircraft were two or more months past due on $19.9 million of lease payments relating to some of
those aircraft. Of this amount, we recognized $14.7 million in rental income through June 30, 2010.
In comparison, at June 30, 2009, 22 customers operating 109 aircraft were two or more months past
due on $80.6 million of lease payments relating to some of those aircraft, $70.0 million of which
we recognized in rental income through June 30, 2009. The decrease is primarily due to
restructuring $35.1 million of past due lease payments in the fourth quarter of 2009 and $15.9
million during the six months ended June 30, 2010.
Management also reviews all outstanding notes that are in arrears to determine whether we
should reserve for, or write off any portion of, the notes receivable. In this process, management
evaluates the collectability of each note and the value of the underlying collateral, if any, by
discussing relevant operational and financial issues facing the lessees with our marketing
executives. As of June 30, 2010, customers with $2.3 million carrying value of notes receivable,
net of reserves, were two months or more behind on principal and interest payments totaling $4.9
million.
Despite industry cyclicality and current financial stress, we remain optimistic about the
long-term future of air transportation and, more specifically, the growing role that the leasing
industry and ILFC specifically, provides in facilitating the fleet transactions necessary for the
growth of commercial air transport. At June 30, 2010, we had signed leases for all of our new
aircraft deliveries through the end of August 2012. Furthermore, our contractual purchase
commitments for future new aircraft deliveries from 2011 to 2019 are at historic lows. For these
reasons, we believe we are well positioned to manage the current cycle and to take advantage of
improving market conditions.
Liquidity
During the six months ended June 30, 2010, we regained access to debt markets, to which we had
limited access throughout 2009. We issued secured and unsecured debt aggregating $4.4 billion to
support our liquidity needs in excess of our operating cash flows. The $4.4 billion included
borrowing $326.8 million under our 2004 ECA facility to finance five Airbus aircraft and to
re-finance five Airbus aircraft purchased in 2009, entering into new secured financing transactions
aggregating $1.3 billion, and issuing $2.75 billion aggregate principal amount of
unsecured senior notes in private placements. Of the $1.3 billion of secured financings, $501
million was restricted from use in our operations at June 30, 2010, and becomes available to us as
we transfer collateral to certain subsidiaries we created to hold the aircraft serving as
collateral.
As of June 30, 2010, we had approximately $3.9 billion of cash and cash equivalents, $383
million of which was restricted under our ECA facilities due to our current long-term debt ratings
and $501 million of which is
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restricted until we transfer collateral, as described above. At August
5, 2010, $74.2 million of the $501 million had become available to us. See Note D of Notes to
Condensed Consolidated Financial Statements.
At June 30, 2010, we did not have any borrowing capacity available under our revolving credit
facilities and one facility with $2.0 billion outstanding is scheduled to mature in October 2010.
In addition, we had minimal capacity under the permitted secured indebtedness basket contained in
our public debt indentures and certain of our bank loans. At June 30, 2010, we were able to enter
into secured financings for up to 12.5% of our consolidated net tangible assets, as defined in our
debt agreements, which was approximately $5 billion, nearly all of which we had borrowed. On April
16, 2010, we amended our revolving bank facility originally maturing in October 2011 to, among
other things, increase our capacity to enter into secured financings to up to 35% of consolidated
net tangible assets upon the completion of certain collateralization requirements. Prior to the
completion of the collateralization requirements, we can incur secured indebtedness in excess of
the current permitted secured indebtedness basket of 12.5% of consolidated tangible net assets
under certain of our bank facilities, provided that we use the net cash proceeds to prepay the
obligations under our revolving credit facility maturing in October 2010 and one of our term loans
maturing in 2011. Under our public debt indentures we may also be able to obtain secured financings
without regard to the 12.5% consolidated net tangible assets limit in such indentures by doing so
through subsidiaries that qualify as non-restricted subsidiaries under our public debt indentures.
We anticipate that we will complete most of the sales of 55 aircraft that are classified as
Flight equipment held for sale at June 30, 2010, during the remainder of 2010. The sales will
generate approximately $2.1 billion in proceeds. The proceeds are receivable upon the completion of
each individual sale. As of August 5, 2010, we had completed four sales generating proceeds of
$108.9 million. The 56 aircraft reclassified to Flight equipment held for sale generated aggregate
quarterly lease revenue of approximately $70 million. As part of our ongoing fleet strategy, we may
pursue additional potential aircraft sales. In evaluating potential aircraft sales, we are
balancing the need for funds with the long-term value of holding aircraft and other financing
alternatives. Because the current market for aircraft is depressed due to the economic downturn and
limited availability of buyer financing, any additional aircraft sales would likely also result in
a realized loss. As discussed above under Operating Results, due to current market conditions, we
recorded aircraft impairment losses of $404.3 million and lease related expenses of $89.2 million
for the six months ended June 30, 2010, related to disposals, or contracted future disposals, of
aircraft.
We do not have any scheduled aircraft purchases delivering during the remainder of 2010, and
six new aircraft with an estimated purchase price of $247.6 million are scheduled to deliver during
2011. We plan to finance those deliveries partly by operating cash flows and partly by incurring
additional debt. If we are unable to meet our aircraft purchase commitments as they become due, it
could expose us to breach of contract claims by our lessees and the manufacturers, as discussed
under Part II Item 1A. Risk Factors Liquidity Risk.
We believe the sources of liquidity mentioned above, together with our cash generated from
operations, will be sufficient to operate our business and repay our debt maturities for at least
the next twelve months.
In addition, based on our level of increased liquidity and expected future sources of funding,
including future cash flows from operations, AIG now expects that we will be able to meet our
existing obligations as they become due for at least the next twelve months solely from our future
cash flows from operations, potential debt issuances and aircraft sales. Therefore, while AIG has
acknowledged its intent to support us through February 28, 2011, at the current time AIG believes
that any further extension of such support will not be necessary. We are also currently seeking
financing, which could be secured or unsecured debt, to repay all or a portion of the outstanding
amount of approximately $3.9 billion under our term loans from AIG Funding. See Debt FinancingsLoans
from AIG Funding below.
Our Relationship with AIG
Potential Change in Ownership
AIG does not have any present intention to sell us. If AIG does sell 51% or more of our common
stock without certain lenders consent, it would be an event of default under certain of our bank
term loans and revolving credit agreements and would allow our lenders to declare such debt
immediately due and payable. Accordingly, any
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such sale of us by AIG would require consideration of
these credit arrangements. In addition, an event of default or declaration of acceleration under
our bank term loans and revolving credit agreements could also result in an event of default under
our other debt agreements, including the indentures governing our public debt. If AIG sells any
portion of its equity interest in us, we would be required to prepay all amounts outstanding under
the loans we entered into with AIG Funding on October 13, 2009, which are described below under
Debt Financings Loans from AIG Funding.
AIG has been dependent on transactions with the FRBNY as its primary source of liquidity, as
more fully described in AIGs Quarterly Report on Form 10-Q for the period ended June 30, 2010.
AIG Loan from the FRBNY
AIG has a revolving credit facility and a guarantee and pledge agreement with the FRBNY. AIGs
obligations under the FRBNY Credit Agreement are guaranteed by certain AIG subsidiaries and secured
by a pledge of certain assets of AIG and its subsidiaries. We have entered into guarantee
agreements under which we agreed to guarantee AIGs repayment of the FRBNY Credit Agreement up to
the aggregate outstanding loan obligations we owe to AIG Funding, which is currently $3.9 billion.
See Debt FinancingsLoans from AIG Funding below. As a subsidiary of AIG, we are also subject to
covenants under the FRBNY Credit Agreement, including covenants that may, among other things, limit
our ability to incur debt, encumber our assets, enter into sale-leaseback transactions, make equity
or debt investments in other parties and pay distributions and dividends on our capital stock. AIG
is required to repay the FRBNY Credit Agreement primarily from proceeds of sales of assets,
including businesses. AIG is exploring divestiture opportunities for its non-core businesses.
Although AIG has no present intention to sell us, it is considering strategic alternatives for
ILFC, which may include the sale of additional aircraft portfolios to third parties.
AIG Going Concern Consideration
In connection with the preparation of its quarterly report on Form 10-Q for the quarter ended
June 30, 2010, AIG management assessed whether AIG has the ability to continue as a going concern.
Based on the U.S. governments continuing commitment, the already completed transactions with the
FRBNY, AIG managements plans and progress made to stabilize its businesses and dispose of certain
of its assets, and after consideration of the risks and uncertainties of such plans, AIG management
indicated in the AIG quarterly report on Form 10-Q for the period ended June 30, 2010, that it
believes that it will have adequate liquidity to finance and operate its businesses, execute its
asset disposition plan, and repay its obligations for at least the next twelve months. It is
possible that the actual outcome of one or more of AIG managements plans could be materially
different, or that one or more of AIG managements significant judgments or estimates about the
potential effects of these risks and uncertainties could prove to be materially incorrect, or that
the transactions with the FRBNY discussed in AIGs Form 10-Q fail to achieve their desired
objectives. If one or more of these possible outcomes is realized and financing is not available,
AIG may need additional U.S. government support to meet its obligations as they come due. If AIG is
not able to continue as a going concern it will have a significant impact on our operations,
including limiting our ability to issue new debt.
Critical Accounting Policies and Estimates
Managements discussion and analysis of our financial condition and results of operations are
based upon our condensed, consolidated financial statements, which have been prepared in accordance
with GAAP for interim financial information and in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. Periodically, we
evaluate the estimates and judgments, including those related to revenue, depreciation, overhaul
reserves and contingencies. The estimates are based on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. The results form the basis
for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different
assumptions and conditions.
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We believe that the following critical accounting policies can have a significant impact on
our results of operations, financial position and financial statement disclosures, and may require
subjective and complex estimates and judgments.
| Lease Revenue | ||
| Initial Indirect Costs | ||
| Flight Equipment Marketing | ||
| Provision for Overhauls | ||
| Flight Equipment | ||
| Derivative Financial Instruments | ||
| Fair Value Measurements | ||
| Income Taxes |
For a detailed discussion on the application of these accounting policies, see Part II
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the year ended December 31, 2009. Also see Note C of Notes to
Condensed, Consolidated Financial Statements for additional clarification of our policy on the
recording of gains (losses) in Flight equipment marketing.
Debt Financings
We generally fund our operations, including aircraft purchases, through available cash
balances, internally generated funds, including aircraft sales, and debt financings. We borrow
funds to purchase new and used flight equipment, make progress payments during aircraft
construction and pay off maturing debt obligations. These funds have in the past been borrowed
principally on an unsecured basis from various sources, and include both public debt and bank
facilities. During 2009, we were unable to access our traditional sources of liquidity and borrowed
$3.9 billion from AIG Funding, a subsidiary of AIG.
During the six months ended June 30, 2010, we borrowed approximately $4.4 billion and $1.6
billion was provided by operating activities. The $4.4 billion borrowed included $2.75 billion
aggregate principal amount of senior unsecured notes, $1.3 billion of secured financings, and
$326.8 million borrowed under our 2004 ECA facility to fund Airbus aircraft purchases. At June 30,
2010, we had approximately $3 billion in cash and cash equivalents available for use in our
operations and $884 million of restricted cash, $74.2 million of which subsequently became
available as we fulfilled certain collateral requirements, as discussed below under Other Secured
Financing Arrangements. We also have agreed to sell aircraft that will generate future cash flows
of approximately $2.1 billion.
At June 30, 2010, we were in compliance in all material respects with the covenants in our
debt agreements, including our financial covenants to maintain a maximum ratio of consolidated
indebtedness to consolidated tangible net worth, a minimum fixed charge coverage ratio and a
minimum consolidated tangible net worth.
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Our debt financing was comprised of the following at June 30, 2010 and December 31, 2009:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Secured |
||||||||
ECA financings |
$ | 3,051,370 | $ | 3,004,763 | ||||
Loans from AIG Funding |
3,938,487 | 3,909,567 | ||||||
Bank debt (a) |
2,155,000 | | ||||||
Other secured financings (b) |
1,444,775 | 153,116 | ||||||
10,589,632 | 7,067,446 | |||||||
Unsecured |
||||||||
Bonds and Medium-Term Notes |
17,435,560 | 16,566,099 | ||||||
Bank debt |
2,464,250 | 5,087,750 | ||||||
19,899,810 | 21,653,849 | |||||||
Total Secured and Unsecured Debt Financing |
30,489,442 | 28,721,295 | ||||||
Less: Deferred debt discount |
(65,492 | ) | (9,556 | ) | ||||
30,423,950 | 28,711,739 | |||||||
Subordinated Debt |
1,000,000 | 1,000,000 | ||||||
$ | 31,423,950 | $ | 29,711,739 | |||||
Selected interest rates and ratios which
include the economic effect of derivative
instruments: |
||||||||
Composite interest rate |
5.07 | % | 4.35 | % | ||||
Percentage of total debt at fixed rates |
59.66 | % | 58.64 | % | ||||
Composite interest rate on fixed rate debt |
5.96 | % | 5.42 | % | ||||
Bank prime rate |
3.25 | % | 3.25 | % |
(a) | On April 16, 2010, we entered into an amendment to our revolving credit facility dated October 13, 2006. Upon effectiveness of this amendment, approximately $2.2 billion of our previously unsecured bank debt became secured by the equity interests in certain of our non-restricted subsidiaries. Those subsidiaries, upon completion of the transfer of certain aircraft into the subsidiaries, will hold a pool of aircraft with an appraised value of not less than 133% of the principal amount of the outstanding loans. | |
(b) | Includes secured financings non-recourse to ILFC of $121.7 million and $129.6 million at June 30, 2010 and December 31, 2009, respectively. |
The above amounts represent the anticipated settlement of our outstanding debt
obligations as of June 30, 2010 and December 31, 2009. Certain adjustments required to present
currently outstanding hedged debt obligations have been recorded and presented separately on our
Condensed, Consolidated Balance Sheet, including adjustments related to foreign currency hedging
and interest rate hedging activities. We have eliminated the currency exposure arising from foreign
currency denominated notes by hedging the notes through swaps. Foreign currency denominated debt is
translated into US dollars using exchange rates as of each balance sheet date. The foreign exchange
adjustment for the foreign currency denominated debt hedged with derivative contracts increased the
balance by $56.4 million at June 30, 2010 and $391.1 million at December 31, 2009. Composite
interest rates and percentages of total debt at fixed rates reflect the effect of derivative
instruments. The higher composite interest rate at June 30, 2010, compared to December 31, 2009, is
due to recently issued secured and unsecured debt with relatively higher interest rates due to our
current long-term debt ratings. We expect our composite interest rate to increase as we refinance
our existing debt with higher cost financings.
We have created wholly-owned subsidiaries for the purpose of purchasing aircraft and obtaining
financings secured by such aircraft. These entities are non-restricted subsidiaries, as defined by
our public debt indentures, and meet the definition of a VIE. We have determined that we are the
primary beneficiary of such VIEs and,
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accordingly, we consolidate such entities into our condensed, consolidated financial statements.
See Note L of Notes to Condensed, Consolidated Financial Statements for more information on VIEs.
ECA Financings
We entered into ECA facility agreements in 1999 and 2004 through non-restricted subsidiaries.
The facilities were used to fund purchases of Airbus aircraft through 2001 and June 2010,
respectively. New financings are no longer available to us under either ECA facility. The loans
made under the ECA facilities were used to fund a portion of each aircrafts net purchase price.
The loans are guaranteed by various European ECAs. We have collateralized the debt with pledges of
the shares of wholly-owned subsidiaries that hold title to the aircraft financed under the
facilities.
In January 1999, we entered into the 1999 ECA facility to borrow up to $4.3 billion for the
purchase of Airbus aircraft delivered through 2001. We used $2.8 billion of the amount available
under this facility to finance purchases of 62 aircraft. Each aircraft purchased was financed by a
ten-year fully amortizing loan with interest rates ranging from 5.753% to 5.898%. At June 30, 2010,
17 loans with an aggregate principal value of $72.8 million remained outstanding under the facility
and the net book value of the aircraft owned by the subsidiary was $1.7 billion.
In May 2004, we entered into the 2004 ECA facility, which was most recently amended in May
2009 to allow us to borrow up to $4.6 billion for the purchase of Airbus aircraft delivered through
June 30, 2010. We used $4.3 billion of the available amount to finance purchases of 76 aircraft.
Each aircraft purchased was financed by a ten-year fully amortizing loan. As of June 30, 2010,
approximately $3 billion was outstanding under this facility. The interest rates on the loans
outstanding under the facility are either fixed or based on LIBOR and ranged from 0.39% to 4.71% at
June 30, 2010. The net book value of the related aircraft was $4.4 billion at June 30, 2010.
Our current long-term debt ratings require us to segregate security deposits, maintenance
reserves and rental payments received for aircraft with loan balances outstanding under the 1999
and 2004 ECA facilities (segregated rental payments are used to make scheduled principal and
interest payments on the outstanding debt). The segregated funds are deposited into separate
accounts pledged to and controlled by the security trustees of the facilities. In addition, we must
register the existing individual mortgages on the aircraft funded under both the 1999 and 2004 ECA
facilities in the local jurisdictions in which the respective aircraft are registered (mortgages
are only required to be filed on aircraft with loan balances outstanding or otherwise as agreed in
connection with the cross-collateralization as described below). At June 30, 2010, we had
segregated security deposits, maintenance reserves and rental payments aggregating approximately
$383 million related to aircraft funded under the 1999 and 2004 ECA facilities. The segregated
amounts will fluctuate with changes in deposits, maintenance reserves and debt maturities related
to the aircraft funded under the facilities.
During the first quarter of 2010, we entered into agreements to cross-collateralize the 1999
ECA facility with the 2004 ECA facility. As part of such cross-collateralization we (i) guaranteed
the obligations under the 2004 ECA facility through our subsidiary established to finance Airbus
aircraft under our 1999 ECA facility; (ii) agreed to grant mortgages over certain aircraft financed
under the 1999 ECA facility (including aircraft which are not currently subject to a loan under the
1999 ECA facility) and security interests over other collateral related to the aircraft financed
under the 1999 ECA facility to secure the guaranty obligation; (iii) accepted a loan-to-value ratio
(aggregating the loans and aircraft from the 1999 ECA facility and the 2004 ECA facility) of at
least fifty percent, in order to release liens (including the cross-collateralization arrangement)
on any aircraft financed under the 1999 ECA facility or other assets related to the aircraft; and
(iv) agreed to allow proceeds generated from certain disposals of aircraft to be applied to
obligations under both the 1999 ECA and 2004 ECA facilities.
We also agreed to additional restrictive covenants relating to the 2004 ECA facility,
restricting us from (i) paying dividends on our capital stock with the proceeds of asset sales and
(ii) selling or transferring aircraft with an aggregate net book value exceeding a certain
disposition amount, which is currently approximately $10.7 billion. The disposition amount will be
reduced by approximately $91.4 million at the end of each calendar quarter during
the effective period. The covenants are in effect from the date of the agreement until
December 31, 2012. A breach of these restrictive covenants would result in a termination event for
the ten loans funded subsequent to the date of
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the agreement and would make those loans, which
aggregated $318.0 million at June 30, 2010, due in full at the time of such a termination event.
In addition, if a termination event resulting in an acceleration event were to occur under the
1999 or 2004 ECA facility, we would have to segregate lease payments, maintenance reserves and
security deposits received after such acceleration event occurred relating to all the aircraft
subject to the 1999 ECA facility, including those aircraft no longer subject to a loan.
Loans from AIG Funding
In March 2009, we entered into two demand note agreements aggregating $1.7 billion with AIG
Funding in order to fund our liquidity needs. Interest on the notes was based on LIBOR with a floor
of 3.5%. On October 13, 2009, we amended and restated the two demand note agreements, including
extending the maturity dates, and entered into a new $2.0 billion credit agreement with AIG
Funding. We used the proceeds from the $2.0 billion loan to repay in full our obligations under our
$2.0 billion revolving credit facility that matured on October 15, 2009. On December 4, 2009, we
borrowed an additional $200 million from AIG Funding to repay maturing debt. The amount was added
to the principal balance of the new credit agreement. These loans, aggregating $3.9 billion, mature
on September 13, 2013, and are due in full at maturity with no scheduled amortization. The loans
initially bore interest at 3-month LIBOR plus a margin of 3.025%, which was subsequently increased
to a margin of 6.025%, as discussed below. The funds for the loans were provided to AIG Funding by
the FRBNY pursuant to the FRBNY Credit Agreement. In order to receive the FRBNYs consent to the
loans, we entered into guarantee agreements to guarantee the repayment of AIGs obligations under
the FRBNY Credit Agreement up to an amount equal to the aggregate outstanding balance of the loans
from AIG Funding.
These loans (and the related guarantees) are secured by (i) a portfolio of aircraft and all
related equipment and leases, with an aggregate average appraised value as of April 26, 2010, of
approximately $7.2 billion plus additional temporary collateral with an aggregate average appraised
value as of April 26, 2010, of approximately $9.2 billion that will be released upon the perfection
of certain security interests, as described below; (ii) any and all collection accounts into which
rent, maintenance reserves, security deposits and other amounts owing are paid under the leases of
the pledged aircraft; and (iii) the shares or other equity interests of certain subsidiaries of
ours that may own or lease the pledged aircraft in the future. In the event the appraised value of
the collateral held falls below certain levels, we will be forced either to prepay a portion of the
term loans without penalty or premium, or to grant additional collateral.
We are also required to prepay the loans, without penalty or premium, upon (i) the sale of a
pledged aircraft (other than upon the sale or transfer to a co-borrower under the loans) in an
amount equal to 75% of the net sale proceeds; (ii) the receipt of any hull insurance, condemnation
or other proceeds in respect of any event of loss suffered by a pledged aircraft in an amount equal
to 75% of the net proceeds received on account thereof; and (iii) the removal of an aircraft from
the collateral pool (other than in connection with the substitution of a non-pool aircraft for such
removed aircraft in accordance with the terms of the loans) in an amount equal to 75% of the most
recent appraised value of such aircraft. In addition, we are required to repay the loans in full
upon the occurrence of a change in control, which is defined in the loan agreements to include AIG
ceasing to beneficially own 100% of our equity interests. We may voluntarily prepay the loans in
part or in full at any time without penalty or premium. On April 13, 2010, we entered into an
agreement to sell a portfolio of 53 aircraft, some of which serve as collateral for the loans from
AIG Funding, and we agreed with AIG Funding and the FRBNY not to make any prepayment of the loans
in connection with the sale but to substitute alternative aircraft for the aircraft serving as
collateral that are being sold. On July 6, 2010, we entered into an agreement to sell a portfolio
of six aircraft, all of which serve as collateral for the loans from AIG Funding, and we intend to
prepay the loans in an amount equal to 75% of the net sale proceeds.
The loans contain customary affirmative and negative covenants and include restrictions on
asset transfers and capital expenditures. The loans also contain customary events of default,
including an event of default under the loans if an event of default occurs under the FRBNY Credit
Agreement. One event of default under the loans was the failure to perfect security interests, for
the benefit of AIG Funding and the FRBNY, in certain aircraft pledged as collateral by December 1,
2009. We were unable to perfect certain of these security interests in a manner
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satisfactory to the
FRBNY by December 1, 2009, and as a result entered into temporary waivers and amendments which (i)
will require us to transfer pledged aircraft to special purpose entities within a prescribed time
period (not less than three months from the date of notice) upon request, at any time by AIG
Funding (the Transfer Mandate) and (ii) allow us to release the temporary collateral of
approximately $9.2 billion once we have completed such transfers and perfected the security
interests of all such aircraft for the benefit of AIG Funding and the FRBNY. In addition, we were
required to add certain aircraft leasing subsidiaries as co-obligors on the loans. Pursuant to the
temporary waiver and amendment, until all perfection requirements with regard to the pledged
aircraft have been satisfied, the interest rate was increased to three-month LIBOR plus a margin of
6.025%, of which 3.0% may be paid-in-kind (of which some has been added to the principal balance of
the loans and some has been paid in cash). Additionally, if we do not comply with a Transfer
Mandate within the prescribed time period, we will be in default under the loan agreements with AIG
Funding and the interest rate may increase to three-month LIBOR with a 2.0% floor plus a margin of
9.025%. As of August 6, 2010, the FRBNY had not presented us with a Transfer Mandate. Within 30
days after our compliance with the perfection requirements for all of the pledged aircraft,
including the transfer of all pledged aircraft to special purpose entities, a pool of aircraft with
a 50% loan-to-value ratio will be selected by AIG Funding and the FRBNY from the pledged aircraft,
and the remaining additional temporary collateral will be released. In addition, after our
compliance with the perfection requirements, the interest margin of the loans will revert to
3.025%.
We are currently seeking financing, which could be secured or unsecured debt, to repay all or
a portion of the outstanding amount of approximately $3.9 billion under our term loans from AIG
Funding.
Secured Bank Debt
We have a revolving credit facility, dated October 13, 2006, under which the maximum amount
available of $2.5 billion is outstanding. On April 16, 2010, we entered into an amendment to this
facility with lenders holding $2.155 billion of the outstanding loans under the facility (the
Electing Lenders). Subject to the satisfaction of the collateralization requirements discussed
below, the Electing Lenders agreed to, among other things:
| Increase our permitted secured indebtedness basket under the credit facility from 12.5% to 35% of our Consolidated Tangible Net Assets, as defined in the credit agreement; | ||
| Extend the scheduled maturity date of their loans totaling $2.155 billion to October 2012. The extended loans will bear interest at LIBOR plus a margin of 2.15%, plus facility fees of 0.2% on the outstanding principal balance; and | ||
| Permit liens securing (i) the loans held by the Electing Lenders and (ii) certain funded term loans in an aggregate amount not to exceed $500 million. |
The collateralization requirement provides that the $2.155 billion of loans held by Electing
Lenders must be secured by a lien on the equity interests of certain of ILFCs non-restricted
subsidiaries that will own aircraft with aggregate appraised values of not less than 133% of the
$2.155 billion principal amount (the Required Collateral Amount). We must transfer all aircraft
meeting the Required Collateral Amount to the pledged subsidiaries prior to April 16, 2011. The
amendment also requires, subject to our right to post cash collateral for any shortfall, that we
transfer one third of the required aircraft on or prior to October 16, 2010, and an additional one
third of the required aircraft on or prior to January 16, 2011. After we have transferred the
required amount of aircraft to the pledged subsidiaries, the credit facility includes an ongoing
requirement, tested periodically, that the appraised value of the eligible aircraft owned by the
pledged subsidiaries must be equal to or greater than 100% of the Required Collateral Amount. This
ongoing requirement is subject to the right to transfer additional eligible aircraft to the pledged
subsidiaries or ratably prepay the loans held by the Electing Lenders. We also guarantee the
loans held by the Electing Lenders through certain other subsidiaries.
The amended facility permits us to incur liens securing certain additional secured
indebtedness prior to the satisfaction of the collateralization requirement, provided we use any
net cash proceeds from the additional secured indebtedness to prepay the obligations under our
revolving credit facility expiring in October 2010 and one of our term loans maturing in 2011. The
amended facility prohibits us from re-borrowing amounts repaid under this facility for any reason.
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The remaining $345 million of loans held by lenders who are not party to the amendment will
mature on their originally scheduled maturity date in October 2011 without any increase to the
margin.
Other Secured Financing Arrangements
In May 2009, ILFC provided $39.0 million of subordinated financing to a non-restricted
subsidiary. The entity used these funds and an additional $106.0 million borrowed from third
parties to purchase an aircraft, which it leases to an airline. ILFC acts as servicer of the lease
for the entity. The $106.0 million loan has two tranches. The first tranche is $82.0 million, fully
amortizes over the lease term, and is non-recourse to ILFC. The second tranche is $24.0 million,
partially amortizes over the lease term, and is guaranteed by ILFC. Both tranches of the loan are
secured by the aircraft and the lease receivables. Both tranches mature in May 2018 with interest
rates based on LIBOR. At June 30, 2010, the interest rates on the $82.0 million and $24.0 million
tranches were 3.504% and 5.204%, respectively. The entity entered into two interest rate cap
agreements to economically hedge the related LIBOR interest rate risk in excess of 4.00%. At June
30, 2010, $95.1 million was outstanding under the two tranches and the net book value of the
aircraft was $139.6 million.
In June 2009, we borrowed $55.4 million through a non-restricted subsidiary, which
owns one aircraft leased to an airline. Half of the original loan amortizes over five years and the
remaining $27.7 million is due in 2014. The loan is non-recourse to ILFC and is secured by the
aircraft and the lease receivables. The interest rate on the loan is fixed at 6.58%. At June 30,
2010, $49.7 million was outstanding and the net book value of the aircraft was $92.9 million.
On March 17, 2010, we entered into a $750 million term loan agreement secured by 43 aircraft
and all related equipment and leases. The aircraft had an average appraised base market value of
approximately $1.3 billion, for an initial loan-to-value ratio of approximately 56%. The loan
matures on March 17, 2015, and bears interest at LIBOR plus a margin of 4.75% with a
LIBOR floor of 2.0%. The principal of the loan is payable in full at maturity with no scheduled
amortization, but we can voluntarily prepay the loan at any time, subject to a 1% prepayment
penalty prior to March 17, 2011. On March 17, 2010, we also entered into an additional term loan
agreement of $550 million through a newly formed non-restricted subsidiary. The
obligations of the subsidiary borrower are guaranteed on an unsecured basis by ILFC and on a
secured basis by certain non-restricted subsidiaries of ILFC that hold title to 37 aircraft. The
aircraft had an average appraised base market value of approximately $969 million, for an initial
loan-to-value ratio of approximately 57%. The loan matures on March 17, 2016, and bears interest at
LIBOR plus a margin of 5.0% with a LIBOR floor of 2.0%. The principal of the loan is
payable in full at maturity with no scheduled amortization. The proceeds from this loan are
restricted from use in our operations until we transfer the related collateral to the
non-restricted subsidiaries. At June 30, 2010, $501 million of the proceeds remained restricted. At
August 5, 2010, $74.2 million of the $501 million had become available to us. We can voluntarily
prepay the loan at any time subject to a 2% prepayment penalty prior to March 17, 2011, and a 1%
prepayment penalty prior to March 17, 2012. Both loans require a loan-to-value ratio of no more
than 63%.
Bonds and Medium-Term Notes
Automatic Shelf Registration: We have an effective automatic shelf registration statement
filed with the SEC. As a result of our WKSI status, we have an unlimited amount of debt securities
registered for sale. At June 30, 2010,
we had $12.8 billion of bonds and MTNs outstanding, issued under previous registration
statements, with interest rates ranging from 0.62% to 7.95%.
Euro Medium-Term Note Programme: We have a $7.0 billion Euro Medium-Term Note Programme, under
which we have $1.9 billion of Euro denominated notes outstanding. The notes mature through 2011 and
bear interest based on Euribor with spreads ranging from 0.375% to 0.450%. We have hedged the notes
into U.S. dollars and fixed interest rates ranging from 4.615% to 5.367%. The programme is
perpetual and the principal amount of a bond becomes available for new issuances at maturity.
Other Senior Notes: On March 22, 2010 and April 6, 2010, we issued a combined $1.25 billion
aggregate principal amount of 8.625% senior notes due September 15, 2015, and $1.5 billion
aggregate principal amount of 8.750% senior notes due March 15, 2017, pursuant to an indenture
dated as of March 22, 2010. The aggregate net
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proceeds from the issuances were approximately $2.67
billion after deducting initial purchasers discounts and estimated offering expenses. The notes
are due in full on their scheduled maturity dates. The notes are not subject to redemption prior to
their stated maturity and there are no sinking fund requirements. In connection with the note
issuances, we entered into registration rights agreements obligating us to, among other things,
complete a registered exchange offer to exchange the notes of each series for new registered notes
of such series with substantially identical terms, or register the notes pursuant to a shelf
registration statement.
If (i) the registration statement for the exchange offer is not declared effective by the SEC
by January 26, 2011, or ceases to be effective during the required effectiveness period, (ii) we
are unable to consummate the exchange offer by March 22, 2011, or (iii) if applicable, the shelf
registration statement has not been declared effective or ceases to be effective during the
required effectiveness period, the annual interest rate on affected notes will increase by 0.25%
per year for the first 90-day period during which such registration default continues. The annual
interest rate on such notes will increase by an additional 0.25% per year for each subsequent
90-day period during which such registration default continues, up to a maximum additional rate of
0.50% per year. If the registration default is cured, the applicable interest rate will revert to
the original level.
The indenture governing the notes contains customary covenants that, among other things,
restrict our and our restricted subsidiaries ability to (i) incur liens on assets; (ii) declare or
pay dividends or acquire or retire shares of our capital stock during certain events of default;
(iii) designate restricted subsidiaries as non-restricted subsidiaries or designate non-restricted
subsidiaries; (iv) make investments in or transfer assets to non-restricted subsidiaries; and (v)
consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets.
Unsecured Bank Debt
Revolving Credit Facility: We have a $2.0 billion unsecured revolving credit facility, entered
into with an original group of 35 banks, expiring in October 2010. This revolving credit facility
provides for interest rates that vary according to the pricing option selected at the time of
borrowing. Pricing options include a base rate, a rate ranging from 0.25% over LIBOR to 0.65% over
LIBOR based upon utilization, or a rate determined by a competitive bid process with the banks. The
credit facility is subject to facility fees, currently 0.2% of amounts available. We are currently
paying the maximum fees under the facility. The fees are based on our current credit ratings and
may decrease in the event of an upgrade to our ratings. As of June 30, 2010, the maximum amount
available of $2.0 billion under our unsecured revolving credit facility was outstanding and
interest was accruing at 0.90%.
On April 16, 2010, we entered into an amendment to our revolving credit facility expiring in
October 2010. The amendment permits, among other things, liens securing (i) the loans under the
revolving credit facility originally expiring in October 2011 and (ii) certain other funded term
loans in an aggregate principal amount not to exceed $500 million. The amendment also permits
certain additional secured indebtedness in excess of the credit facilitys permitted secured
indebtedness basket of 12.5% of Consolidated Tangible Net Assets (as defined in the
credit agreement), provided we use any net cash proceeds from such additional secured
indebtedness to prepay the obligations under the revolving credit facility expiring in October 2010
and one of our term loans maturing in 2011.
In addition, $345 million of the outstanding loans under our revolving credit facility
originally expiring in October 2011, held by lenders not party to the amendment to that facility,
remain unsecured and will mature on their originally scheduled maturity date in October 2011. See
Secured Bank Debt above.
Term Loans: From time to time, we enter into funded bank financing arrangements. As of June
30, 2010, approximately $119 million was outstanding under these term loan agreements, with varying
maturities through December 2011. The interest rates are based on LIBOR with spreads ranging from
0.3% to 1.8%. At June 30, 2010, the interest rates ranged from 0.61% to 2.34%. In April 2010, we
prepaid $410 million of our term loans with original maturity dates in 2011 and 2012. We also
amended two of our remaining term loans to allow additional liens in excess of our bank facilities
permitted secured indebtedness basket of 12.5% of Consolidated Tangible Net Assets, in certain
cases subject to prepayment requirements similar to the requirements described above for our
revolving credit facility due October 2010. See Unsecured Bank DebtRevolving Credit Facility
above. In
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
connection with such amendments, we increased the interest rate spread on our $75 million
term loan maturing in December 2011 by 1.5%.
Subordinated Debt
In December 2005, we issued two tranches of subordinated debt totaling $1.0 billion. Both
tranches mature on December 21, 2065, but each tranche has a different call option. The $600
million tranche has a call option date of December 21, 2010, and the $400 million tranche has a
call option date of December 21, 2015. The tranche with the 2010 call option date has a fixed
interest rate of 5.90% for the first five years, and the tranche with the 2015 call option date has
a fixed interest rate of 6.25% for the first ten years. Each tranche has an interest rate
adjustment if the call option for that tranche is not exercised. The new interest rate would be a
floating rate, reset quarterly, based on the initial credit spread of 1.55% and 1.80%,
respectively, plus the highest of (i) 3 month LIBOR; (ii) 10-year constant maturity treasury; and
(iii) 30-year constant maturity treasury.
Commercial Paper
Commercial Paper: We have a $6.0 billion Commercial Paper Program and we had access to the
FRBNY CPFF until January 2009. As previously discussed under Liquidity, due to our current
short-term debt ratings it is presently economically unattractive to issue new commercial paper and
we cannot determine when we may issue commercial paper again. At June 30, 2010, we have no
commercial paper outstanding.
Derivatives
We employ derivative products to manage our exposure to interest rates risks and foreign
currency risks. We enter into derivative transactions only to economically hedge interest rate risk
and currency risk and not to speculate on interest rates or currency fluctuations. These derivative
products include interest rate swap agreements, foreign currency swap agreements and interest rate
cap agreements. At June 30, 2010, all our interest rate swap and foreign currency swap agreements
were designated as and accounted for as cash flow hedges and we had not designated our interest
rate cap agreements as hedges.
When interest rate and foreign currency swaps are effective as cash flow hedges, they offset
the variability of expected future cash flows, both economically and for financial reporting
purposes. We have historically used such instruments to effectively mitigate foreign currency and
interest rate risks. The effect of our ability to apply hedge accounting for the swap agreements is
that changes in their fair values are recorded in OCI instead of in earnings for each reporting
period. As a result, reported net income will not be directly influenced by changes in interest
rates and currency rates.
The counterparty to our interest rate swaps and foreign currency swaps is AIGFP, a
non-subsidiary affiliate. The swap agreements are subject to a bilateral security agreement and a
master netting agreement, which would
allow the netting of derivative assets and liabilities in the case of default under any one
contract. Failure of the counterparty to perform under the derivative contracts would have a
material impact on our results of operations and cash flows. The counterparty to our interest rate
cap agreements is an independent third party with whom we do not have a master netting agreement.
Credit Ratings
Our current long-term debt ratings impose the following restrictions under our 1999 and 2004
ECA facilities: (i) we must segregate all security deposits, maintenance reserves and rental
payments related to the aircraft financed under our 1999 and 2004 ECA facilities into separate
accounts controlled by the security trustees (segregated rental payments are used to make scheduled
principal and interest payments on the outstanding debt) and (ii) we must file individual mortgages
on the aircraft funded under both the1999 and 2004 ECA facilities in the local jurisdictions in
which the respective aircraft are registered.
While a ratings downgrade does not result in a default under any of our debt agreements, it
would adversely affect our ability to issue unsecured debt, obtain new financing arrangements or
renew existing arrangements, and would increase the cost of such financing arrangements.
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The following table summarizes our current ratings by Fitch, Moodys and S&P, the nationally
recognized rating agencies:
Unsecured Debt Ratings
Date of Last | ||||||||
Rating Agency | Long-term Debt | Corporate Rating | Outlook | Ratings Action | ||||
Fitch | BB | BB | Evolving | April 30, 2010 | ||||
Moodys | B1 | Not Rated | Negative | December 18, 2009 | ||||
S&P | BB+ | BBB- | Negative | January 25, 2010 |
Secured Debt Ratings
$750 Million | $550 Million | |||
Rating Agency | Term Loan | Term Loan | ||
Fitch | BBB- | BB | ||
Moodys | Ba2 | Ba3 | ||
S&P | BBB | BBB- |
These credit ratings may be changed, suspended or withdrawn at any time by the rating agencies
as a result of various circumstances including changes in, or unavailability of, information.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Existing Commitments
The following table summarizes our contractual obligations at June 30, 2010:
Commitments Due by Fiscal Year | ||||||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Bonds and medium-term
notes |
$ | 17,435,560 | $ | 2,143,282 | $ | 4,379,105 | $ | 3,570,786 | $ | 3,541,361 | $ | 1,040,482 | $ | 2,760,544 | ||||||||||||||
Unsecured Bank Loans |
2,464,250 | 2,044,250 | 420,000 | | | | | |||||||||||||||||||||
Secured Bank Loans |
2,155,000 | | | 2,155,000 | | | | |||||||||||||||||||||
ECA Financings |
3,051,370 | 258,216 | 458,007 | 428,960 | 428,960 | 423,863 | 1,053,364 | |||||||||||||||||||||
Other Secured Financings |
1,444,775 | 6,588 | 13,901 | 14,878 | 15,963 | 36,716 | 1,356,729 | |||||||||||||||||||||
Loans from AIG Funding |
3,938,487 | | | | 3,938,487 | | | |||||||||||||||||||||
Subordinated Debt |
1,000,000 | | | | | | 1,000,000 | |||||||||||||||||||||
Interest Payments on Debt
Outstanding (a)(b)(c) |
8,246,245 | 823,020 | 1,359,429 | 1,086,916 | 828,988 | 488,189 | 3,659,703 | |||||||||||||||||||||
Operating Leases (d)(e) |
65,580 | 5,792 | 11,968 | 12,448 | 12,947 | 13,362 | 9,063 | |||||||||||||||||||||
Pension Obligations (f) |
8,483 | 1,268 | 1,319 | 1,370 | 1,431 | 1,512 | 1,583 | |||||||||||||||||||||
Purchase Commitments |
13,502,100 | | 247,600 | 639,400 | 1,103,000 | 1,822,700 | 9,689,400 | |||||||||||||||||||||
Total |
$ | 53,311,850 | $ | 5,282,416 | $ | 6,891,329 | $ | 7,909,758 | $ | 9,871,137 | $ | 3,826,824 | $ | 19,530,386 | ||||||||||||||
Contingent Commitments
Contingency Expiration by Fiscal Year | ||||||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
AVGs (g) |
$ | 554,524 | $ | | $ | 27,842 | $ | 78,950 | $ | 96,003 | $ | 39,115 | $ | 312,614 | ||||||||||||||
Total (h) |
$ | 554,524 | $ | | $ | 27,842 | $ | 78,950 | $ | 96,003 | $ | 39,115 | $ | 312,614 | ||||||||||||||
(a) | Includes interest on loans from AIG Funding. | |
(b) | Future interest payments on floating rate debt are estimated using floating interest rates in effect at June 30, 2010. | |
(c) | Includes the effect of interest rate and foreign currency derivative instruments. | |
(d) | Excludes fully defeased aircraft sale-lease back transactions. | |
(e) | Minimum rentals have not been reduced by minimum sublease rentals of $7.2 million receivable in the future under non-cancellable subleases. | |
(f) | Our pension obligations are part of intercompany expenses, which AIG allocates to us on an annual basis. The amount is an estimate of such allocation. The column 2010 consists of total estimated allocations for 2010 and the column Thereafter consists of the 2015 estimated allocation. The amount allocated has not been material to date. | |
(g) | From time to time, we participate with airlines, banks and other financial institutions in the financing of aircraft by providing asset guarantees, put options or loan guarantees collateralized by aircraft. As a result, should we be called upon to fulfill our obligations, we would have recourse to the value of the underlying aircraft. | |
(h) | Excluded from total contingent commitments are $196.5 million of uncertain tax liabilities. The future cash flows to these liabilities are uncertain and we are unable to make reasonable estimates of the outflows. |
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Off-Balance-Sheet Arrangements
We have not established any unconsolidated entities for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes. We have,
however, from time to time established subsidiaries, entered into joint ventures or created other
partnership arrangements or trusts with the limited purpose of leasing aircraft or facilitating
borrowing arrangements. See Note L of Notes to Condensed, Consolidated Financial Statements for
more information regarding our involvement with VIEs.
Results of Operations
Income before Income Taxes for the Three and Six Months Ended June 30, 2010 Versus 2009
We reported income before income taxes of approximately $174.4 million and $75.7 million for
the three- and six-month periods ended June 30, 2010, representing decreases of approximately
$190.0 million and $603.6 million, respectively, as compared to the same periods in 2009. The
decreases were primarily due to the following factors:
| To generate liquidity to repay maturing debt obligations, at April 13, 2010, and July 6, 2010, we contracted to sell two portfolios aggregating 59 aircraft. During the three months ended June 30, 2010, we transferred 56 aircraft from our leased fleet to Flight equipment held for sale and completed the sale of one of those aircraft. As part of our normal recurring fleet assessment, we also completed the sale of two other aircraft and designated another aircraft for part-out. Due to current market conditions we recorded impairment charges on the aircraft sold or classified as Flight equipment held for sale. We also recorded lease related charges related to some of those aircraft. | ||
| Our cost of borrowing for new financings is increasing due to our current long-term debt ratings, which affects our composite interest rates. Our average composite interest rate for the three- and six-month periods ended June 30, 2010, increased 0.57% and 0.33%, respectively, as compared to the same periods in 2009. | ||
| Our estimated future overhaul reimbursements increased and we recorded related charges to Provision for overhauls for the three and six months ended June 30, 2010. |
See below for a more detailed discussion of the effects of each item affecting income for the
three and six months ended June 30, 2010, as compared with the same periods in 2009.
Three Months Ended June 30, 2010 Versus 2009
Revenues from rentals of flight equipment decreased 0.5% to $1,291.8 million for the three
months ended June 30, 2010, from $1,298.9 million for the same period in 2009. The number of
aircraft in our fleet decreased to 946 at June 30, 2010, compared to 992 at June 30, 2009,
primarily due to reclassification of 56 aircraft to Flight equipment held for sale. Revenues from
rentals of flight equipment decreased by (i) $48.8 million because we did not record lease revenue
related to 50 of the aircraft classified as Flight equipment held for sale after April 13, 2010,
because the rentals will be paid to the purchaser upon the aircrafts delivery; (ii) $11.2 million
due to a decrease in lease rates on aircraft in our fleet during both periods, that were re-leased
or had lease rates change between the two periods; and (iii) $6.2 million due to a decrease related
to aircraft in service during the three months ended June 30, 2009, and sold prior to June 30,
2010. These revenue decreases were partly offset by increases of (i) $30.7 million due to the
addition of new aircraft to our fleet after June 30, 2009, and aircraft in our fleet as of June 30,
2009, that earned revenue for a greater number of days during the three-month period ended June 30,
2010, than during the same period in 2009; (ii) $14.2 million due to an increase in the number of
leases containing overhaul provisions
and an increase in the aggregate hours flown on which we collect overhaul revenue; and (iii)
$14.2 million due to fewer aircraft in transition between lessees and a decrease in repossessions
of aircraft during the period.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
Three aircraft in our fleet were not subject to a signed lease agreement or a signed letter of
intent at June 30, 2010, two of which were subsequently leased.
In addition to our leasing operations, we engage in the marketing of our flight equipment
throughout the lease term, as well as the sale of third party owned flight equipment and other
marketing services on a principal and commission basis. We incurred a loss of $56.5 million from
flight equipment marketing for the three months ended June 30, 2010, compared to revenue of $9.3
million for the same period in 2009. The loss was primarily due to impairment and lease related
charges related to aircraft reclassified to Flight equipment held for sale during the three months
ended June 30, 2010. To generate liquidity to repay maturing obligations, on July 6, 2010, we
entered into an agreement to sell a portfolio of six aircraft. We recorded impairment losses
aggregating $40.1 million and lease related charges of $5.9 million related to the portfolio during
the three months ended June 30, 2010. In addition, as part of our normal recurring fleet
assessment, we recorded an impairment charge of $12.4 million for the three months ended June 30,
2010, related to an aircraft designated for part-out. Flight equipment marketing revenue of $9.3
million for the three months ended June 30, 2009, was primarily generated from the sale of two
aircraft. See Note C of Notes to Condensed, Consolidated Financial Statements.
Interest and other revenue decreased to $8.8 million for the three months ended June 30, 2010,
compared to $22.0 million for the same period in 2009 due to (i) a $7.0 million increase in foreign
exchange loss, net of gains; (ii) a $5.4 million decrease in other revenue due to proceeds received
in the three month period ended June 30, 2009, related to a loss of an aircraft, with no such
proceeds received in the three months ended June 30, 2010; (iii) a $3.1 million decrease in
revenues from VIEs, which we consolidated into our 2009 income statement and deconsolidated January
1, 2010, as a result of our adoption of new accounting guidance; and (iv) a $1.3 million decrease
in forfeitures of security deposits due to lessees non-performance under leases. These decreases
were partially offset by (i) an increase in interest and dividend revenue of $2.7 million driven by
an increase in our notes receivable balance and (ii) other minor fluctuations aggregating $0.9
million.
Interest expense increased to $407.7 million for the three months ended June 30, 2010,
compared to $353.2 million for the same period in 2009 due to a 0.57% increase in our average
composite interest rate and an increase in average debt outstanding (excluding the effect of debt
discount and foreign exchange adjustments) to $32.0 billion during the three months ended June 30,
2010, compared to $31.8 billion during the same period in 2009.
Our composite borrowing rates in the second quarters of 2010 and 2009, which include the
effect of derivatives, were as follows:
Increase | ||||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Beginning of Quarter |
4.69 | % | 4.37 | % | 0.32 | % | ||||||
End of Quarter |
5.07 | % | 4.25 | % | 0.82 | % | ||||||
Average |
4.88 | % | 4.31 | % | 0.57 | % |
We recorded a charge of $4.8 million and income of $6.4 million related to derivatives for the
three months ended June 30, 2010 and 2009, respectively, primarily related to ineffectiveness of
derivatives designated as cash flow hedges. (See Note G of Notes to Condensed, Consolidated
Financial Statements.)
Depreciation of flight equipment decreased 2.7% to $475.7 million for the three months ended
June 30, 2010, compared to $488.8 million for the same period in 2009, due to a decrease in the
cost of our fleet from $44.5 billion at June 30, 2009 to $40.8 billion at June 30, 2010. The
decrease is primarily due to the reclassification of 50 aircraft to Flight equipment held for sale,
which were not depreciated after April 13, 2010.
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Provision for overhauls increased to $127.9 million for the three months ended June 30, 2010,
compared to $74.1 million for the same period in 2009 primarily due to a $42.6 million charge
recorded for the three months ended June 30, 2010, to reflect an increase in our estimated future
reimbursements. We collect overhaul revenue on the aggregate number of hours flown and an increase
in hours flown result in an increase in the estimated future reimbursements.
Flight equipment rent expense relates to two sale-leaseback transactions.
Selling, general and administrative expenses decreased to $49.1 million for the three months
ended June 30, 2010, compared to $51.6 million for the same period in 2009 due to (i) a $5.0
million decrease in Salaries and employee related expenses driven primarily by performance
incentive and retention bonuses awarded in the prior year which did not recur in the current
period; (ii) a decrease in aircraft related operating expenses of $5.0 million resulting from the
reduction in the number of aircraft included in our leased fleet; and (iii) $4.1 million decrease
in expenses from VIEs, which we consolidated into our 2009 income statement and deconsolidated
January 1, 2010, as a result of our adoption of new accounting guidance. These decreases were
partially offset by (i) an $8.1 million impairment charge for an aircraft subject to ongoing
litigation with a foreign customs authority and (ii) a $3.5 million charge to record spare parts
inventory to its fair value.
Our effective tax rate for the quarter ended June 30, 2010, increased slightly to 36.5% from
35.0% for the same period in 2009. Our effective tax rate continues to be impacted by minor
permanent items and interest accrued on uncertain tax positions and prior period audit adjustments.
Our reserve for uncertain tax positions increased by $18.3 million for the three-month period ended
June 30, 2010, as compared to the same period in 2009 due to the continued uncertainty of tax
benefits related to the Foreign Sales Corporation and Extraterritorial Income regimes, the benefits
of which, if realized, would have a significant impact on our effective tax rate.
Other comprehensive income was $24.9 million for the three months ended June 30, 2010,
compared to a loss of $28.2 million for the same period in 2009. This change was primarily due to
changes in the market value on derivatives qualifying for and designated as cash flow hedges, which
includes other comprehensive income of $25.2 million and a charge of $62.6 million relating to CVA
and MVA for the three-month periods ended June 30, 2010 and 2009, respectively.
Six Months Ended June 30, 2010 Versus 2009
Revenues from rentals of flight equipment increased slightly to $2,616.5 million for the six
months ended June 30, 2010, from $2,560.3 million for the same period in 2009. The number of
aircraft in our fleet decreased to 946 at June 30, 2010, compared to 992 at June 30, 2009,
primarily due to reclassification of 56 aircraft to Flight equipment held for sale. Revenues from
rentals of flight equipment increased by (i) $85.3 million due to the addition of new aircraft to
our fleet after June 30, 2009, and aircraft in our fleet as of June 30, 2009, that earned revenue
for a greater number of days during the six-month period ended June 30, 2010, than during the same
period in 2009; (ii) $36.1 million due to an increase in the number of leases containing overhaul
provisions and an increase in the aggregate hours flown on which we collect overhaul revenue; and
(iii) $4.4 million due to fewer aircraft in transition between lessees and a decrease in
repossessions of aircraft during the period. These revenue increases were partially offset by
decreases of (i) $38.9 million because we did not record lease revenue related to 50 of the
aircraft classified as Flight equipment held for sale after April 13, 2010, because the rentals
will be paid to the purchaser
upon the aircrafts delivery; (ii ) $20.2 million due to lower lease rates on aircraft in our
fleet during both periods, that were re-leased or had lease rates change between the two periods;
and (iii) $10.5 million related to aircraft in service during the six months ended June 30, 2009,
and sold prior to June 30, 2010.
Three aircraft in our fleet were not subject to a signed lease agreement or a signed letter of
intent at June 30, 2010, two of which were subsequently leased.
In addition to our leasing operations, we engage in the marketing of our flight equipment
throughout the lease term, as well as the sale of third party owned flight equipment and other
marketing services on a principal and
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
commission basis. We incurred a loss of $492.6 million from flight equipment marketing for the six
months ended June 30, 2010, compared to revenue of $3.1 million for the same period in 2009. To
generate liquidity to repay maturing obligations, since April 1, 2010, we have entered into
agreements to sell two portfolios aggregating 59 aircraft. We have recorded impairment losses
aggregating $359.3 million and lease related charges of $75.6 million related to the portfolios
during the six months ended June 30, 2010.
Additionally, during the six months ended June 30, 2010, as part of our normal recurring fleet
assessment, we sold two aircraft to a third party and designated one aircraft for part-out. We
recorded impairment losses aggregating $45.0 million and lease related expenses of $13.5 million
related to the three aircraft during the six months ended June 30, 2010. In comparison, we sold two
aircraft to third parties during the six months ended June 30, 2009, and recorded an impairment
charge of $7.5 million related an aircraft that was reclassified to held-for sale. See Note C of
Notes to Condensed, Consolidated Financial Statements.
Interest and other revenue decreased to $21.8 million for the six months ended June 30, 2010,
compared to $37.3 million for the same period in 2009 due to (i) a $6.8 million decrease in
revenues from VIEs, which we consolidated into our 2009 income statement and deconsolidated January
1, 2010, as a result of our adoption of new accounting guidance; (ii) a $6.8 increase in foreign
exchange losses, net of gains; and (iii) a $5.4 million decrease in other revenue due to proceeds
related to the loss of an aircraft received in the six-month period ended June 30, 2009, with no
such proceeds received in the six months ended June 30, 2010. These decreases were partially offset
by (i) a $2.3 million increase in interest and dividend revenue; (ii) a $1.1 million increase in
forfeitures of security deposits due to lessees non-performance under leases; and (iii) other
minor fluctuations aggregating an increase of $0.1 million.
Interest expense increased to $742.6 million for the six months ended June 30, 2010, compared
to $708.6 million for the same period in 2009 due to a 0.33% increase in our average composite
interest rate, partially offset by a decrease in average debt outstanding (excluding the effect of
debt discount and foreign exchange adjustments) to $30.6 billion during the six months ended June
30, 2010, compared to $32.1 billion during the same period in 2009.
Our composite borrowing rates in the first six months of 2010 and 2009, which include the
effect of derivatives, were as follows:
Increase | ||||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Beginning of six months |
4.35 | % | 4.51 | % | (0.16 | )% | ||||||
End of six months |
5.07 | % | 4.25 | % | 0.82 | % | ||||||
Average |
4.71 | % | 4.38 | % | 0.33 | % |
We recorded a charge of $44.8 million and income of $4.3 million related to derivatives for
the six months ended June 30, 2010 and 2009, respectively. The charge primarily consisted of losses
on matured swaps aggregating $15.4 million and ineffectiveness on derivatives designated as cash
flow hedges aggregating $25.7 million for the six months ended June 30, 2010. (See Note G of Notes
to Condensed, Consolidated Financial Statements.)
Depreciation of flight equipment remained relatively constant at $965.9 million for the six
months ended June 30, 2010, compared to $960.9 million for the same period in 2009. Depreciation
expense increased due to an increase in the average cost of the fleet generated by aircraft
purchases, which was partially offset by 50 aircraft being reclassified as Flight equipment held
for sale and not depreciated after April 13, 2010.
Provision for overhauls increased to $222.8 million for the six months ended June 30, 2010,
compared to $143.4 million for the same period in 2009 due to (i) an increase in the estimated
future reimbursements resulting in
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
a $56.7 million charge; (ii) an increase in the number of leases with overhaul provisions; and
(iii) an increase in the aggregate number of hours flown. We collect overhaul revenue on the
aggregate number of hours flown and an increase in hours flown result in an increase in the
estimated future reimbursements.
Flight equipment rent expense relates to two sale-leaseback transactions.
Selling, general and administrative expenses decreased to $84.8 million for the six months
ended June 30, 2010, compared to $103.9 million for the same period in 2009 due to (i) a $18.4
million decrease in Salaries and employee related expenses, driven primarily by performance
incentive and retention bonuses awarded in the prior year which did not recur in the current
period; (ii) a $10.1 million decrease in aircraft operating expenses stemming from a reduction in
the size of our leased fleet; and (iii) an $8.7 million decrease in expenses from VIEs, which we
consolidated into our 2009 income statement and deconsolidated January 1, 2010, as a result of our
adoption of new accounting guidance. These decreases were partially offset by (i) an $8.1 million
impairment charge for an aircraft subject to ongoing litigation with a foreign customs authority;
(ii) a $4.6 million increase in write-off of notes receivable; (iii) a $3.5 million impairment
charge to record spare parts inventory to its fair value; and (iv) other minor fluctuations
aggregating an increase of $1.9 million.
Our effective tax rate for the six months ended June 30, 2010, increased slightly to 36.9%
from 35.2% for the same period in 2009. Our effective tax rate continues to be impacted by minor
permanent items and interest accrued on uncertain tax positions and prior period audit adjustments.
Our reserve for uncertain tax positions increased by $30.7 million for the six-month period ended
June 30, 2010, as compared to the same period in 2009, due to the continued uncertainty of tax
benefits related to the Foreign Sales Corporation and Extraterritorial Income regimes, the benefits
of which, if realized, would have a significant impact on our effective tax rate.
Other comprehensive income was $74.5 million for the six months ended June 30, 2010, compared
to a loss of $10.1 million for the same period in 2009. This change was primarily due to changes in
the market value on derivatives qualifying for and designated as cash flow hedges, which includes
other comprehensive income of $47.2 million and a charge of $60.4 million relating to CVA and MVA
for the six month periods ended June 30, 2010 and 2009, respectively.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Value at Risk
Measuring potential losses in fair values is performed through the application of various
statistical techniques. One such technique is VaR, a summary statistical measure that uses
historical interest rates, foreign currency exchange rates and equity prices and which estimates
the volatility and correlation of these rates and prices to calculate the maximum loss that could
occur over a defined period of time given a certain probability.
Management believes that statistical models alone do not provide a sufficient method of
monitoring and controlling market risk. While VaR models are relatively sophisticated, the
quantitative market risk information generated is limited by the assumptions and parameters
established in creating the related models. Therefore, such models are tools and do not substitute
for the experience or judgment of senior management.
We are exposed to market risk and the risk of loss of fair value and possible liquidity strain
resulting from adverse fluctuations in interest rates and foreign exchange prices. We statistically
measure the loss of fair value through the application of a VaR model on a quarterly basis. In this
analysis, our net fair value is determined using the financial instrument and other assets. This
analysis also includes tax adjusted future flight equipment lease revenues and financial instrument
liabilities, which includes future servicing of current debt. The estimated impact of current
derivative positions is also taken into account.
We calculate the VaR with respect to the net fair value by using historical scenarios. This
methodology entails re-pricing all assets and liabilities under explicit changes in market rates
within a specific historical time period. In this case, the most recent three years of historical
information for interest rates and foreign exchange rates were used to construct the historical
scenarios at June 30, 2010, and December 31, 2009. For each scenario, each financial instrument is
re-priced. Scenario values for us are then calculated by netting the values of all the underlying
assets and liabilities. The final VaR number represents the maximum adverse deviation in net fair
value incurred under these scenarios over a one-month period with 95% confidence (i.e. only 5% of
historical scenarios show losses greater than the VaR figure). A one month holding period is
assumed in computing the VaR figure. The table below presents the average, high and low VaRs on a
combined basis and of each component of market risk for us for the periods ended June 30, 2010 and
December 31, 2009. Total VaR for ILFC increased from the fourth quarter of 2009 to the second
quarter of 2010 due to an increase in interest rates and an increase in volatility of interest
rates.
ILFC Market Risk | ||||||||||||||||||||||||
At | At | |||||||||||||||||||||||
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Average | High | Low | Average | High | Low | |||||||||||||||||||
Combined |
$ | 56.2 | $ | 106.1 | $ | 20.0 | $ | 46.5 | $ | 80.0 | $ | 35.9 | ||||||||||||
Interest Rate |
56.2 | 106.1 | 20.0 | 46.6 | 80.0 | 36.2 | ||||||||||||||||||
Currency |
0.1 | 0.3 | | 0.3 | 0.7 | 0.1 |
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ITEM 4. | CONTROLS AND PROCEDURES |
(A) | Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the periods specified in the
rules and forms of the Securities and Exchange Commission, and such information is
accumulated and communicated to our management, including the Chairman of the Board and
Chief Executive Officer and the Vice Chairman and Chief Financial Officer (collectively, the
Certifying Officers), as appropriate, to allow timely decisions regarding required
disclosure. Our management, including the Certifying Officers, recognizes that any set of
controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
We have evaluated, under the supervision and with the participation of management,
including the Certifying Officers, the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a 15(e) and 15d 15(e) of the Securities Exchange Act
of 1934 as of June 30, 2010. Based on that evaluation, our Certifying Officers have
concluded that our disclosure controls and procedures were effective at the reasonable
assurance level at June 30, 2010.
(B) | Changes in Internal Control Over Financial Reporting |
There has been a change in our Certifying Officers. On May 18, 2010, Henri Courpron was
named Chief Executive Officer and is signing this Form 10-Q as the Principal Executive
Officer. Alan H. Lund, formerly our interim President and Chief Executive Officer, remains
as Vice Chairman and President.
Other than the changes discussed in the previous paragraph, there have been no changes
in our internal control over financial reporting during the three months ended June 30,
2010, that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Flash Airlines: We are named in lawsuits in connection with the January 3, 2004, crash of our
Boeing 737-300 aircraft on lease to Flash Airlines, an Egyptian carrier. These lawsuits were filed
by the families of victims on the flight and seek unspecified damages for wrongful death, costs and
fees. The initial lawsuit was filed in May 2004 in California, and subsequent lawsuits were filed
in California and Arkansas. All cases filed in the U.S. were dismissed on the grounds of forum non
conveniens and transferred to the French Tribunal de Grande Instance civil court in either Bobigny
or Paris. The Bobigny plaintiffs challenged French jurisdiction, whereupon the French civil court
decided to retain jurisdiction. On appeal the Paris Court of Appeal reversed, and on appeal the
French Cour de Cassation elected to defer its decision pending a trial on the merits. We believe we
are adequately covered in these cases by the liability insurance policies carried by Flash Airlines
and we have substantial defenses to these actions. We do not believe that the outcome of these
lawsuits will have a material effect on our consolidated financial condition, results of operations
or cash flows.
Krasnoyarsk Airlines: We leased a 757-200ER aircraft to a Russian airline, KrasAir, which is
now the subject of a Russian bankruptcy-like proceeding. The aircraft lease was assigned to another
Russian carrier, Air Company Atlant-Soyuz Incorporated, which defaulted under the lease. The
aircraft has been detained by the Russian customs authorities on the basis of certain alleged
violations of the Russian customs code by KrasAir. While we have prevailed in court proceedings,
Russian custom authorities will not provide relevant documents to permit the aircraft to be removed
from Russia. We are now pursuing alternative options to resolve the situation and, as such, have
performed a recoverability assessment of the fair value of the aircraft. The aircraft was deemed to
be impaired and we recorded an $8.1 million impairment charge to Selling, general and
administrative expenses in the three months ended June 30, 2010. The aircraft had a net book value
of $19.8 million at June 30, 2010. We cannot predict what the outcome of this matter will be, but
we do not believe that it will be material to our consolidated financial position, results of
operations or cash flows.
Estate of Volare Airlines: In November 2004, Volare, an Italian airline, filed for bankruptcy
in Italy. Prior to Volares bankruptcy, we leased to Volare, through wholly-owned subsidiaries, two
A320-200 aircraft and four A330-200 aircraft. In addition, we managed the lease to Volare by an
entity that is a related party to us of one A330-200 aircraft. In October 2009, the Volare
bankruptcy receiver filed a claim in an Italian court in the amount of 29.6 million against us and
our related party for the return to the Volare estate of all payments made by it to us and our
related party in the year prior to Volares bankruptcy filing. We have engaged Italian counsel to
represent us and intend to defend this matter vigorously. We cannot predict the outcome of this
matter, but we do not believe that it will be material to our consolidated financial position,
results of operations or cash flows.
We are also a party to various claims and litigation matters arising in the ordinary course of
our business. We do not believe the outcome of any of these matters will be material to our
consolidated financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
Our business is subject to numerous significant risks and uncertainties as described below.
Many of these risks are interrelated and occur under similar business and economic conditions, and
the occurrence of certain of them may in turn cause the emergence, or exacerbate the effect, of
others. Such a combination could materially increase the severity of the impact on us.
Capital Structure Risk
The aircraft leasing business is capital intensive and we have a substantial amount of
indebtedness, which requires significant interest and principal payments. As of June 30, 2010, we
had approximately $31.5 billion in principal amount of indebtedness outstanding.
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PART II. OTHER INFORMATION (CONTINUED)
Our substantial level of indebtedness could have important consequences to holders of our
debt, including the following:
| making it more difficult for us to satisfy our obligations with respect to our indebtedness; | ||
| requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for other purposes, including acquiring new aircraft and exploring business opportunities; | ||
| increasing our vulnerability to adverse economic and industry conditions; | ||
| limiting our flexibility in planning for, or reacting to, changes in our business and industry; and | ||
| limiting our ability to borrow additional funds or refinance our existing indebtedness. |
Liquidity Risk
We will require a significant amount of cash to service our indebtedness and make planned
capital expenditures and we may not have adequate capital resources to meet our obligations as they
become due.
We have generally financed our aircraft purchases through available cash balances, internally
generated funds, including aircraft sales and debt financings. During 2009, we were unable to issue
commercial paper or unsecured debt and relied primarily on loans from AIG Funding, an affiliate of
our parent, to fulfill our liquidity needs. The loans are secured by a portfolio of aircraft and
other assets related to the pledged aircraft. In the first half of 2010, we regained access to debt
markets, to which we had limited access throughout 2009, and issued secured and unsecured debt
aggregating approximately $4.4 billion to support our liquidity needs in excess of our operating
cash flows. The $4.4 billion included borrowing $326.8 million under our 2004 ECA facility to
finance five Airbus aircraft and to re-finance five Airbus aircraft purchased in 2009, entering
into new secured financing transactions aggregating $1.3 billion, and issuing $2.75 billion
aggregate principal amount of unsecured senior notes in private placements. Of the $1.3 billion of
secured financings, $501 million was restricted from use in our operations at June 30, 2010, and
becomes available to us as we transfer collateral to certain subsidiaries we created to hold the
aircraft serving as collateral. At August 5, 2010, $74.2 million of the $501 million had become
available to us.
At June 30, 2010, the maximum amount available under our revolving credit facilities was
outstanding. At June 30, 2010, we had approximately $3.9 billion of cash and cash equivalents, $383
million of which was restricted under our ECA facilities and $501 million of which becomes
available to us as we transfer collateral, as described above. See Note D of Notes to Condensed
Consolidated Financial Statements.
Under our existing public debt indentures and certain of our bank loans, as of June 30, 2010,
we and our subsidiaries were restricted from incurring secured indebtedness in excess of 12.5% of
consolidated net tangible assets, as defined in our debt agreements. At June 30, 2010, we had
minimal capacity under this limit, which was approximately $5 billion. On April 16, 2010, subject
to the completion of certain collateralization requirements, we amended our bank facilities to
increase our capacity to enter into secured financings up to 35% of consolidated net tangible
assets, as defined in the debt agreements, currently approximately $15 billion, provided that we
must use the proceeds from certain additional secured indebtedness to prepay the obligations under
our revolving credit facility due in October 2010 and one of our term loans maturing in 2011. Prior
to the completion of the collateralization requirements, we can incur secured indebtedness in
excess of the 12.5% limit under our bank facilities, provided we use the proceeds to prepay the
obligations under our revolving credit facility due in October 2010 and one of our term loans
maturing in 2011. Under our indentures we may, subject to receipt of any required consents under
the FRBNY Credit Agreement and our bank facilities and term loans, be able to obtain secured
financings without regard to the 12.5% consolidated net tangible asset limit referred to above (but
subject to certain other limitations) by doing so through subsidiaries that qualify as
non-restricted under our public debt indentures.
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PART II. OTHER INFORMATION (CONTINUED)
In the six months ended June 30, 2010, we agreed to sell 59 aircraft. One sale was completed
during the period and 55 of the aircraft were classified as Flight equipment held for sale.
Proceeds from the sales will aggregate
approximately $2.1 billion. The proceeds are receivable upon the completion of each individual
sale, and we expect most of the sales to be consummated during the remainder of 2010. As of August
5, 2010, we had completed four sales generating proceeds of $108.9 million.
We are currently pursuing additional potential aircraft sales and we have presented proposed
portfolios to potential buyers. In evaluating these potential sales, we are balancing the need for
funds with the long-term value of holding aircraft and long-term prospects for us. Significant
uncertainties exist as to the aircraft comprising any actual sale portfolio, the sale price of any
such portfolio, and whether we could reach an agreement with terms acceptable to all parties.
Furthermore, if an agreement is reached, the transaction would have to be approved by the FRBNY.
Therefore, we cannot predict whether an additional sale of aircraft will occur. Because the current
market for aircraft is depressed due to the economic downturn and limited availability of buyer
financing, a sale would likely result in a realized loss. Based on the range of potential aircraft
portfolio sales currently being explored, the potential for impairment or realized loss could be
material to the results of operations for an individual period. The amount of potential loss would
be dependent upon the specific aircraft sold, the sale price, the sale date and any other sale
contingencies.
We have no new aircraft scheduled to deliver during the remainder of 2010 and six new aircraft
are scheduled to deliver during 2011. We expect to finance the aircraft scheduled for delivery in
2011 partly from cash generated from operations and partly by incurring additional debt.
There is no guarantee that we will continue to have access to the secured or unsecured debt
markets in the future or that we will be able to sell additional aircraft. We believe that our cash
on hand, cash flows generated from operations, which include aircraft sales, together with the cash
generated from the above-mentioned financing arrangements are sufficient for us to operate our
business and repay our maturing debt obligations for the next twelve months. If we are unable to
raise sufficient cash from these strategies, we may be unable to meet our debt obligations as they
become due. Further, we may not be able to meet our aircraft purchase commitments as they become
due, which could expose us to breach of contract claims by our lessees and manufacturers.
In addition, based on our level of increased liquidity and expected future sources of funding,
including future cash flows from operations, AIG now expects that we will be able to meet our
existing obligations as they become due for at least the next twelve months solely from our own
future cash flows. Therefore, while AIG has acknowledged its intent to support us through February
28, 2011, at the current time AIG believes that any further extension of such support will not be
necessary. We are also currently seeking financing, which could be secured or unsecured debt, to
repay all or a portion of the outstanding amount of approximately $3.9 billion under our term loans
from AIG Funding.
Borrowing Risks
Credit Ratings Downgrade Risk Our ability to access debt markets and other financing
sources is, in part, dependent on our credit ratings. In addition to affecting the availability of
financing, credit ratings also directly affect our cost of financing. Since September 2008, we have
experienced multiple downgrades in our credit ratings by the three major nationally recognized
statistical rating organizations. These credit rating downgrades, combined with externally
generated volatility, have limited our ability to access debt markets and resulted in unattractive
funding costs.
Additionally, our current long-term debt ratings impose the following restrictions under our
1999 and 2004 ECA facilities: (i) we must segregate all security deposits, maintenance reserves and
rental payments related to the aircraft financed under our 1999 and 2004 ECA facilities into
separate accounts controlled by the security trustees (segregated rental payments are used to make
scheduled principal and interest payments on the outstanding debt) and (ii) we must file individual
mortgages on the aircraft funded under both the1999 and 2004 ECA facilities in the local
jurisdictions in which the respective aircraft are registered. At June 30, 2010, we had segregated
security
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PART II. OTHER INFORMATION (CONTINUED)
deposits, maintenance reserves and rental payments aggregating approximately $383 million
related to aircraft funded under the 1999 and 2004 ECA facilities.
Further ratings downgrades could increase our borrowing costs and further limit our access to
the unsecured debt markets.
Interest Rate Risk We are impacted by fluctuations in interest rates. Our lease rates are
generally fixed over the life of the lease. Changes, both increases and decreases, in our cost of
borrowing, as reflected in our composite interest rate, directly impact our net income. We manage
the interest rate volatility and uncertainty by maintaining a balance between fixed and floating
rate debt, through derivative instruments and through matching debt maturities with lease
maturities.
Our cost of borrowing for new financings is increasing due to our long-term debt ratings. The
interest rates that we obtain on our debt financing are a result of several components, including
credit spreads, swap spreads, duration and new issue premiums. These are all in addition to the
underlying Treasury or LIBOR rates, as applicable. Volatility in our perceived risk of default, our
parents risk of default or in a market sectors risk of default all have an impact on our cost of
funds. A one percent increase in our composite interest rate at June 30, 2010, would have increased
our interest expense by approximately $300 million annually, which would put downward pressure on
our operating margins.
Restrictive Covenants on Our Operations
The agreements governing certain of our indebtedness contain covenants that restrict, among
other things, our ability to:
| incur debt; | ||
| encumber our assets; | ||
| dispose of certain assets; | ||
| consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; | ||
| enter into sale-leaseback transactions; | ||
| make equity or debt investments in other parties; | ||
| enter into transactions with affiliates; | ||
| make capital expenditures; | ||
| designate our subsidiaries as unrestricted subsidiaries; and | ||
| pay dividends and distributions. |
These covenants may affect our ability to operate and finance our business as we deem
appropriate.
Relationship with AIG
AIG as Our Parent Company We are an indirect wholly-owned subsidiary of AIG. Although
neither AIG nor any of its subsidiaries is a co-obligor or guarantor of our debt securities,
circumstances affecting AIG have an impact on us and we can give no assurance how further changes
in circumstances related to AIG may impact us.
AIG as Our Counterparty of Derivatives AIGFP, a wholly-owned subsidiary of AIG with an
explicit guarantee from AIG, is the counterparty of all our interest rate swaps and foreign
currency swaps. If our counterparty is unable to meet its obligations under the derivative
contracts, it would have a material impact on our financial results and cash flows.
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PART II. OTHER INFORMATION (CONTINUED)
AIG Going Concern Consideration In connection with the preparation of its quarterly report
on Form 10-Q for the quarter ended June 30, 2010, AIG management assessed whether AIG has the
ability to continue as a going
concern. Based on the U.S. governments continuing commitment, the already completed
transactions with the FRBNY, AIG managements plans and progress made to stabilize its businesses
and dispose of certain of its assets, and after consideration of the risks and uncertainties of
such plans, AIG management indicated in the AIG quarterly report on Form 10-Q for the period ended
June 30, 2010, that it believes that it will have adequate liquidity to finance and operate its
businesses, execute its asset disposition plan, and repay its obligations for at least the next
twelve months. It is possible that the actual outcome of one or more of AIG managements plans
could be materially different, or that one or more of AIG managements significant judgments or
estimates about the potential effects of these risks and uncertainties could prove to be materially
incorrect, or that the transactions with the FRBNY discussed in AIGs Form 10-Q fail to achieve
their desired objectives. If one or more of these possible outcomes is realized and financing is
not available, AIG may need additional U.S. government support to meet its obligations as they come
due. If AIG is not able to continue as a going concern it will have a significant impact on our
operations, including limiting our ability to issue new debt.
Key Personnel Risk
Our senior managements reputation and relationships with lessees and sellers of aircraft are
a critical element of our business. The reduction of AIGs common stock price has dramatically
reduced the value of equity awards previously made to our key employees. Furthermore, the American
Recovery and Reinvestment Act of 2009 imposed restrictions on bonus and other incentive
compensation payable to certain AIG employees. Presently, we have one employee, our Vice Chairman
and President, who is subject to these restrictions. Historically we have embraced a
pay-for-performance philosophy. Based on the limitations placed on incentive compensation, it is
unclear whether, for the foreseeable future, we will be able to create a compensation structure
that permits us to retain and motivate our most highly compensated employees and other high
performing employees who may become subject to the limitations. We also stand the risk of our key
employees exploring other career opportunities. On February 5, 2010, Steven F. Udvar-Hazy retired
as a director and our Chief Executive Officer, and John L. Plueger, our President and Chief
Operating Officer, was named Acting Chief Executive Officer. On March 26, 2010, Mr. Plueger retired
as our director, acting Chief Executive Officer, President and Chief Operating Officer. On May 18,
2010, Henri Courpron, formerly the President of the Seabury Group, an advisory and investment
banking firm in aviation and aerospace based in New York and Toulouse, France, and a former
executive at Airbus, was named Chief Executive Officer. Alan H. Lund, previously our Vice Chairman
and Chief Financial Officer, was named Vice Chairman and President, and Frederick S. Cromer,
previously our Senior Vice PresidentFinance, succeeded Mr. Lund as our Chief Financial Officer.
Julie I. Sackman, our Executive Vice President, General Counsel and Secretary, retired effective
May 1, 2010, and Brian M. Monkarsh, formerly our Senior Vice President and Assistant General
Counsel, succeeded Ms. Sackman as Senior Vice President and General Counsel and Secretary. The significant restrictions and
limitations on compensation imposed on us may adversely affect our ability to attract new talent
and to retain and motivate our existing highest performing employees. If we are unable to retain
and motivate our key employees, it could negatively impact our ability to conduct business.
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PART II. OTHER INFORMATION (CONTINUED)
Overall Airline Industry Risk
We operate as a supplier and financier to airlines. The risks affecting our airline customers
are generally out of our control and impact our customers to varying degrees. As a result, we are
indirectly impacted by all the risks facing airlines today. Our ability to succeed is dependent
upon the financial strength of our customers. Their ability to compete effectively in the market
place and manage these risks has a direct impact on us. These risks include:
| Demand for air travel | ||
| Competition between carriers | ||
| Fuel prices and availability | ||
| Labor costs and stoppages | ||
| Maintenance costs | ||
| Employee labor contracts | ||
| Air traffic control infrastructure constraints | ||
| Airport access | ||
| Insurance costs and coverage | ||
| Heavy reliance on automated systems | ||
| Geopolitical events | ||
| Security, terrorism and war | ||
| Worldwide health concerns | ||
| Equity and borrowing capacity | ||
| Environmental concerns | ||
| Government regulation | ||
| Interest rates | ||
| Overcapacity | ||
| Natural disasters |
To the extent that our customers are affected by these risk factors, we may experience:
| lower demand for the aircraft in our fleet and reduced market lease rates and lease margins; | ||
| a higher incidence of lessee defaults, lease restructurings and repossessions affecting net income due to maintenance, consulting and legal costs associated with the repossessions, as well as lost revenue for the time the aircraft are off lease and possibly lower lease rates from the new lessees; | ||
| a higher incidence of situations where we engage in restructuring lease rates for our troubled customers which reduces overall lease revenue; | ||
| an inability to immediately place new and used aircraft on commercially acceptable terms when they become available through our purchase commitments and regular lease terminations, resulting in lower lease margins due to aircraft not earning revenue and resulting in payments for storage, insurance and maintenance; and | ||
| a loss if our aircraft is damaged or destroyed by an event specifically excluded from the insurance policy such as dirty bombs, bio-hazardous materials and electromagnetic pulsing. |
Lessee Non-Performance Risk
Our business depends on the ability of our airline customers to meet their obligations to us
and if their ability materially decreases, it may negatively affect our business, financial
condition, results of operations and cash flows, as discussed above in Overall Airline Industry
Risk.
We manage lessee non-performance risk by obtaining security deposits and overhaul rentals as
well as continuous monitoring of lessee performance and outlook.
Airframe, Engine and Other Manufacturer Risks
The supply of jet transport aircraft, which we purchase and lease, is dominated by two
airframe manufacturers, Boeing and Airbus, and a limited number of engine manufacturers. As a
result, we are dependent on
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PART II. OTHER INFORMATION (CONTINUED)
the manufacturers success in remaining financially stable, producing
aircraft and related components, that meet the
airlines demands, in both type and quantity, and fulfilling their contractual obligations to
us. Further, competition between the manufacturers for market share is intense and may lead to
instances of deep discounting for certain aircraft types and may negatively impact our competitive
pricing. Should the manufacturers fail to respond appropriately to changes in the market
environment or fail to fulfill their contractual obligations, we may experience:
| missed or late delivery of aircraft ordered by us and an inability to meet our contractual obligations to our customers, resulting in lost or delayed revenues, lower growth rates and strained customer relationships; | ||
| an inability to acquire aircraft and related components on terms which will allow us to lease those aircraft to customers at a profit, resulting in lower growth rates or a contraction in our fleet; | ||
| a marketplace with too many aircraft available, creating downward pressure on demand for the aircraft in our fleet and reduced market lease rates; | ||
| poor customer support from the manufacturers of aircraft and components resulting in reduced demand for a particular manufacturers product, creating downward pressure on demand for those aircraft in our fleet and reduced market lease rates for those aircraft; and | ||
| reduction in our competitiveness due to deep discounting by the manufacturers, which may lead to reduced market lease rates and may impact our ability to remarket or sell aircraft in our fleet. |
For example, we have ordered 74 787 aircraft from Boeing with the first aircraft currently
scheduled to deliver in July 2012. The contracted delivery dates were originally scheduled from
January 2010 through 2017, but Boeing has experienced delays in the production of the 787s. We have
signed contracts for 29 of the 74 787s on order. The leases we have signed with our customers and
our purchase agreements with Boeing are both subject to cancellation clauses related to delays in
delivery dates, though as of June 30, 2010, there have been no cancellations by any party. We are
in discussions with Boeing related to revisions to the delivery schedule and potential delay
compensation and penalties for which we may be eligible. Under the terms of our 787 leases,
particular lessees may be entitled to share in any compensation that we receive from Boeing for
late delivery of the aircraft.
Aircraft Related Risks
Residual Value We bear the risk of re-leasing or selling the aircraft in our fleet that are
subject to operating leases at the end of their lease terms. Operating leases bear a greater risk
of realizations of residual values, because only a portion of the equipments value is covered by
contractual cash flows at lease inception. In addition to factors linked to the aviation industry
in general, other factors that may affect the value and lease rates of our aircraft include (i)
maintenance and operating history of the airframe and engines; (ii) the number of operators using
the particular type of aircraft; and (iii) aircraft age. If both demand for aircraft and market
lease rates decrease and the conditions continue for an extended period, they could affect the
market value of aircraft in our fleet and may result in impairment charges. See Part II Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies and Estimates Flight Equipment in our Annual Report on Form 10-K for the
year ended December 31, 2009. Further, deterioration of aircraft values may create losses related
to our aircraft asset value guarantees.
Obsolescence Risk Aircraft are long-lived assets requiring long lead times to develop and
manufacture. As a result, aircraft of a particular model and type tend to become obsolete and less
in demand over time, when newer more advanced and efficient aircraft are manufactured. This life
cycle, however, can be shortened by world events, government regulation or customer preferences. As
aircraft in our fleet approach obsolescence, demand for that particular model and type will
decrease. This may result in declining lease rates, impairment charges or losses related to
aircraft asset value guarantees.
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PART II. OTHER INFORMATION (CONTINUED)
Greenhouse Gas Emissions Risk Aircraft emissions of greenhouse gases vary with aircraft
type and age. In response to climate change, if any, worldwide government bodies may impose future
restrictions or financial
penalties on operations of aircraft with high emissions. It is unclear what effect, if any,
such regulations will have on our operations.
Other Risks
Foreign Currency Risk We are exposed to foreign currency risk through the issuance of debt
denominated in foreign currencies and through leases negotiated in Euros. We reduce the foreign
currency risk by negotiating the majority of our leases in U.S. dollars and by hedging all the
foreign currency denominated debt through derivative instruments. If the Euro exchange rate to the
U.S. dollar deteriorates, we will record less lease revenue on lease payments received in Euros.
Accounting Pronouncements A joint committee of the U.S. Financial Accounting Standards
Board, or FASB, and the International Accounting Standards Board is developing a new standard for
lease accounting. In March 2009, both Boards released separate Discussion Papers for which the
comment period closed in July 2009. The Boards have continued to discuss and modify their views on
the issues presented in the Discussion Papers. The current view is to have lessees record a right
to use asset and a lease obligation on their statement of financial position based upon the
discounted lease payments, as defined. Lessors would record lease receivables and a performance
obligation liability on their statement of financial position also based on the discounted lease
payments, as defined. Lessor revenue would be modified to contain an interest income component as
well as lease revenue. These views continued to be discussed and modified and are subject to
further change as the Boards continue to deliberate. The Boards intend to issue an Exposure Draft
of the proposed standard in the third quarter of 2010 and have a final standard promulgated in the
second quarter of 2011. At present management is unable to assess the effects of adopting the new
standard.
ITEM 5. OTHER INFORMATION
a) | Changes have been made to our board of directors since the filing of our quarterly report on Form 10-Q for the three months ended March 31, 2010. As of the date of this quarterly report, our directors are as follows: |
Name | Title | |
Douglas M. Steenland
|
Chairman | |
Henri Courpron
|
Chief Executive Officer and Director | |
Alan H. Lund
|
Vice Chairman and President | |
Leslie L. Gonda
|
Director | |
Robert H. Benmosche
|
Director | |
William N. Dooley
|
Director | |
David L. Herzog
|
Director |
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PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS
a) | Exhibits |
2.1 | Aircraft Sale Agreement, dated as of April 13, 2010, by and between Macquarie Aerospace Limited, as buyer, and the Company, as seller. | ||
3.1 | Restated Articles of Incorporation of the Company (filed as an exhibit to Form 10-Q for the quarter ended September 30, 2008, and incorporated herein by reference). | ||
3.2 | Amended and Restated By-laws of the Company, as adopted on April 13, 2010. | ||
4.1 | The Company agrees to furnish to the Commission upon request a copy of each instrument with respect to issues of long-term debt of the Company and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the Company and its subsidiaries. | ||
10.1 | Employment Letter, dated May 17, 2010, by and between Henri Courpron and American International Group, Inc. (filed as an exhibit to the Form 8-K filed on May 19, 2010, and incorporated herein by reference). | ||
10.2 | Amendment No. 3 to Schedules of Certain Loan Documents made and entered into as of May 25, 2010, by and among the Company, certain subsidiaries of the Company named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
10.3 | Amendment No. 4 to Schedules of Certain Loan Documents made and entered into as of June 2, 2010, by and among the Company, certain subsidiaries of the Company named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
10.4 | Amendment No. 5 to Schedules of Certain Loan Documents made and entered into as of July 9, 2010, by and among the Company, certain subsidiaries of the Company named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
12. | Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. | ||
31.1 | Certification of Chief Executive Officer. | ||
31.2 | Certification of Senior Vice President and Chief Financial Officer. | ||
32.1 | Certification under 18 U.S.C., Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERNATIONAL LEASE FINANCE CORPORATION
August 6, 2010 | /s/ Henri Courpron | |||
HENRI COURPRON | ||||
Chief Executive Officer (Principal Executive Officer) |
||||
August 6, 2010 | /s/ Frederick S. Cromer | |||
FREDERICK S. CROMER | ||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
August 6, 2010 | /s/ Kurt H. Schwarz | |||
KURT H. SCHWARZ | ||||
Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) | ||||
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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
2.1 | Aircraft Sale Agreement, dated as of April 13, 2010, by and between Macquarie Aerospace Limited, as buyer, and the Company, as seller. | ||
3.1 | Restated Articles of Incorporation of the Company (filed as an exhibit to Form 10-Q for the quarter ended September 30, 2008, and incorporated herein by reference). | ||
3.2 | Amended and Restated By-laws of the Company, as adopted on April 13, 2010. | ||
4.1 | The Company agrees to furnish to the Commission upon request a copy of each instrument with respect to issues of long-term debt of the Company and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of the Company and its subsidiaries. | ||
10.1 | Employment Letter, dated May 17, 2010, by and between Henri Courpron and American International Group, Inc. (filed as an exhibit to the Form 8-K filed on May 19, 2010, and incorporated herein by reference). | ||
10.2 | Amendment No. 3 to Schedules of Certain Loan Documents made and entered into as of May 25, 2010, by and among the Company, certain subsidiaries of the Company named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
10.3 | Amendment No. 4 to Schedules of Certain Loan Documents made and entered into as of June 2, 2010, by and among the Company, certain subsidiaries of the Company named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
10.4 | Amendment No. 5 to Schedules of Certain Loan Documents made and entered into as of July 9, 2010, by and among the Company, certain subsidiaries of the Company named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) | ||
12. | Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. | ||
31.1 | Certification of Chief Executive Officer. | ||
31.2 | Certification of Senior Vice President and Chief Financial Officer. | ||
32.1 | Certification under 18 U.S.C., Section 1350. |
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