UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31,
2010
OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to
_______________
Commission file number
001-31616
INTERNATIONAL LEASE FINANCE
CORPORATION
(Exact name of registrant as
specified in its charter)
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California
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22-3059110
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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10250 Constellation Blvd., Suite 3400
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90067
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Los Angeles, California
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(310) 788-1999
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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6.625% Notes due November 15, 2013
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES x NO o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO x
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 x 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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO x
As of June 30, 2010 and March 9, 2011, there were
45,267,723 shares of Common Stock, no par value,
outstanding, all of which were held by affiliates.
Registrant meets the conditions set forth in General
Instruction I(1)(a) and (b) of
Form 10-K
and is therefore filing this form with the reduced disclosure
format.
INTERNATIONAL
LEASE FINANCE CORPORATION
2010
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I
General
International Lease Finance Corporations (the
Company, ILFC, management,
we, our, us) 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 fleet
management services to investors
and/or
owners of aircraft portfolios for a management fee. In addition
to our leasing and fleet management activities, at times 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.
As of December 31, 2010, we owned 933 jet aircraft, had
four additional aircraft in the fleet classified as finance and
sales-type leases and provided fleet management services for 97
aircraft. See Item 2. Properties
Flight Equipment. At December 31, 2010, we had
contracted with the Boeing Company (Boeing) and
Airbus S.A.S. (Airbus) to purchase 115 new aircraft,
all negotiated in U.S. dollars, for delivery through 2019
with an estimated purchase price of $13.5 billion. See
Item 2. Properties
Commitments. In the first quarter of 2011, we signed a
memorandum of understanding to purchase 75 A320neos and 25
A321neos from Airbus, which will replace our previous A380
commitments, and a purchase agreement for 33
737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019.
We maintain a variety of flight equipment to provide a strategic
mix and balance so as to meet our customers needs and to
maximize our opportunities. To minimize the time that our
aircraft are not leased to customers, we have concentrated our
aircraft purchases on models of new and used aircraft which we
believe will have the greatest airline demand and operational
longevity.
We typically finance the purchase of aircraft through available
cash balances, internally generated funds, including aircraft
sales, and debt financings. At times, we engage in financing
transactions for specific aircraft. Management accesses the
capital markets for funds at times and on terms and conditions
considered appropriate.
The airline industry is cyclical, economically sensitive and
highly competitive. Our continued success is largely dependent
on managements ability to develop customer relationships
for leasing, sales, remarketing and fleet management services
with airlines and other customers best able to maintain their
economic viability and survive in the competitive environment in
which they operate.
The Company is incorporated in the State of California and its
principal offices are located at 10250 Constellation Blvd.,
Suite 3400, Los Angeles, California 90067. Our telephone
number, facsimile number and website address are
(310) 788-1999,
(310) 788-1990,
and www.ilfc.com, respectively. Our EDGAR filings with the
United States Securities and Exchange Commission
(SEC) are available, free of charge, on our website
or by written request to us. The information on our website is
not part of or incorporated by reference into this report.
We are an indirect wholly-owned subsidiary of AIG. AIG is a
holding company which, through its subsidiaries, is engaged in a
broad range of insurance and insurance-related activities in the
United States of America (U.S.) and abroad.
AIGs primary activities include both general insurance and
life insurance and retirement services operations. Another
significant activity is financial services. The common stock of
AIG is listed on, among others, the New York Stock Exchange. In
September 2008, liquidity issues resulted in AIG seeking and
receiving governmental support through a credit facility from
the Federal Reserve Bank of New York (the FRBNY Credit
Facility) and Troubled Asset Relief Program
(TARP) funding from the United States Department of
the Treasury (the Department of the Treasury). On
January 14, 2011, AIG was recapitalized and the FRBNY
Credit Facility was repaid and terminated through a series of
transactions that resulted in the Department of the Treasury
becoming AIGs majority shareholder with ownership of
approximately 92% of AIGs outstanding common stock. AIG
understands that, subject to market conditions, the Department
of the Treasury intends to dispose of its ownership interest in
AIG over time. See Item 7. Managements
Discussion and Analysis of Financial Condition and Result of
Operations Our Relationship with AIG.
1
Aircraft
Leasing
We lease most of our aircraft under operating leases. The cost
of the aircraft is not fully recovered over the term of the
initial lease, and we retain the benefit as well as assume the
risk of the residual value of the aircraft. In accordance with
accounting principles generally accepted in the
U.S. (GAAP), rental revenues are recognized
ratably over the lease term, as they are earned. Our aircraft
under operating leases are included as Flight equipment under
operating leases on our Consolidated Balance Sheets and are
depreciated to an estimated residual value over the estimated
useful lives of the aircraft. On occasion we enter into finance
and sales-type leases where the full cost of the aircraft is
substantially recovered over the term of the lease. The aircraft
under finance and sales-type leases are recorded on our
Consolidated Balance Sheets in Net investment in finance and
sales-type leases. With respect to these leases, we recognize
interest revenues over the lease term in a manner that produces
a constant rate of return over the life of the lease. At
December 31, 2010, we accounted for 933 aircraft as
operating leases and four aircraft as finance and sales-type
leases.
The initial term of our current leases range in length from one
year to 15 years with current maturities through 2021. See
Item 2. Properties Flight
Equipment for information regarding scheduled lease
terminations. We attempt to maintain a mix of short-, medium-
and long-term leases to balance the benefits and risks
associated with different lease terms and changing market
conditions. Varying lease terms help to mitigate the effects of
changes in prevailing market conditions at the time aircraft
become eligible for re-lease or are sold.
All leases are on a net basis with the lessee
responsible for all operating expenses, which customarily
include fuel, crews, airport and navigation charges, taxes,
licenses, registration and insurance. In addition, the lessee is
responsible for normal maintenance and repairs, airframe and
engine overhauls, and compliance with return conditions of
flight equipment on lease. We may, in connection with the lease
of a used aircraft, agree to contribute to the cost of certain
major overhauls or modifications depending on the condition of
the aircraft at delivery. Under the provisions of many leases,
for certain airframe and engine overhauls, we reimburse the
lessee for costs incurred up to, but not exceeding, related
overhaul rentals the lessee has paid to us. We recognize
overhaul rentals received as revenue net of estimated overhaul
reimbursements in the caption Rental of flight equipment in our
Consolidated Statements of Operations. Except as disclosed
above, we generally do not contribute to the cost of overhauls
when we do not receive overhaul rentals.
The lessee is responsible for compliance with all applicable
laws and regulations with respect to the aircraft. We require
our lessees to comply with the standards of either the United
States Federal Aviation Administration (the FAA) or
its foreign equivalent. Generally, we require a deposit as
security for the lessees performance of obligations under
the lease and the condition of the aircraft upon return. In
addition, the leases contain extensive provisions regarding our
remedies and rights in the event of a default by the lessee and
specific provisions regarding the condition of the aircraft upon
its return. The lessee is required to continue to make lease
payments under all circumstances, including periods during which
the aircraft is not in operation due to maintenance or grounding.
Some foreign countries have currency and exchange laws
regulating the international transfer of currencies. When
necessary we require, as a condition to any foreign transaction,
that the lessee or purchaser in a foreign country obtain the
necessary approvals of the appropriate government agency,
finance ministry or central bank for the remittance of all funds
contractually owed in U.S. dollars. We attempt to minimize
our currency and exchange risks by negotiating most of our
aircraft leases in U.S. dollars. All guarantees obtained to
support various lease agreements are denominated for payment in
the same currency as the lease.
To meet the needs of our customers, a few of our leases are
negotiated in Euros. As the Euro to U.S. dollar exchange
rate fluctuates, airlines interest in entering into Euro
denominated lease agreements will change. After we agree to the
rental payment currency with an airline, the negotiated currency
remains for the term of the lease. We had hedged Euro
denominated lease payment cash flows generated by certain leases
that were in effect at March 11, 2005, and these hedges
expired in February 2010. The economic risk arising from foreign
currency denominated leases has, to date, been immaterial to us.
2
Management obtains and reviews relevant business materials from
all prospective lessees and purchasers before entering into a
lease or extending credit. Under certain circumstances, the
lessee may be required to obtain guarantees or other financial
support from an acceptable financial institution or other third
party.
During the life of the lease, situations may lead us to
restructure leases with our lessees. Historically,
restructurings have involved the voluntary termination of leases
prior to lease expiration, the arrangement of subleases from the
primary lessee to another airline, the rescheduling of lease
payments, and modifications of the length of the lease. When we
repossess an aircraft, we frequently export the aircraft from
the lessees jurisdiction. In the majority of these
situations, we have obtained the lessees cooperation and
the return and export of the aircraft was immediate. In some
situations, however, the lessees have not fully cooperated in
returning aircraft. In those cases we have taken legal action in
the appropriate jurisdictions. This process has delayed the
ultimate return and export of the aircraft. In addition, in
connection with the repossession of an aircraft, we may be
required to pay outstanding mechanic, airport, and navigation
fees and other amounts secured by liens on the repossessed
aircraft. These charges could relate to other aircraft that we
do not own but were operated by the lessee.
During 2010, four of our lessees filed for bankruptcy protection
or ceased operations. These customers operated 19 of our
aircraft, of which 15 were leased from us and four were
subleased from another one of our customers. As of March 4,
2011, 14 of these aircraft had been leased to other airlines,
the four aircraft that were subleased remained on lease to the
sublessor airline, and one aircraft had been sold. See
Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations
Overview Aircraft Industry and Sources of
Revenue.
Flight
Equipment Marketing and Aircraft Sales
We may sell our leased aircraft at or before the expiration of
their leases. The buyers of our aircraft include the
aircrafts lessee and other aircraft operators, financial
institutions, private investors and third party lessors. From
time to time, we engage in transactions to buy aircraft for
resale. In other cases, we assist our customers in acquiring or
disposing of aircraft by providing consulting services and
procurement of financing from third parties. Any gain on
disposition of leased aircraft is included in the caption Flight
equipment marketing and gain on aircraft sales in our
Consolidated Statements of Operations.
From time to time, we are engaged as an agent for airlines and
various financial institutions in the disposition of their
surplus aircraft on a fee basis. We generally act as an agent
under an exclusive remarketing contract whereby we agree to sell
aircraft on a commercially reasonable basis within a fixed time
period. These activities generally augment our primary
activities and also serve to promote relationships with
prospective sellers and buyers of aircraft. We may, from time to
time, participate with banks, other financial institutions,
leasing companies, and airlines to assist in financing aircraft
purchased by others and by providing asset value or loan
guarantees collateralized by aircraft on a fee-basis.
We plan to continue to engage in providing marketing services to
third parties on a selective basis involving specific situations
where these activities will not conflict or compete with, but
rather will complement, our leasing and selling activities.
Fleet
Management Services
We provide fleet management services to third party operating
lessors who are unable or unwilling to perform this service as
part of their own operations. We typically provide many of the
same services that we perform for our own fleet. Specifically,
we provide leasing, re-leasing and sales services on behalf of
the lessor for which we charge a fee. The fees for fleet
management services are included in Interest and other in our
Consolidated Statements of Operations.
Financing/Source
of Funds
We purchase new aircraft directly from manufacturers and used
aircraft from airlines and other owners. We have generally
financed our operations, including aircraft purchases, through
available cash balances, internally generated funds, including
aircraft sales, and debt financings. In September 2008, we
became unable to issue
3
unsecured debt and, in 2009, we borrowed approximately
$3.9 billion from AIG Funding Inc., a subsidiary of our
parent, to fulfill our liquidity needs in excess of the cash
flows generated by our operations. In 2010, we regained access
to the debt markets and issued approximately $9.8 billion
of secured and unsecured debt. We used a portion of the proceeds
to repay the loans from AIG Funding, which allowed us to release
approximately $10 billion of excess aircraft collateral
previously pledged as security to AIG Funding. The new debt also
resulted in extended and varying maturity dates for our debt.
See Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity.
Customers
Each airline and its revenues are classified within the
geographical area that represents the airlines principal
place of business for the years indicated.
At December 31, 2010, 2009 and 2008, we leased aircraft to
customers in the following regions:
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Customers by Region
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2010
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2009
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2008
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Number
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Number
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Number
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of
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of
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of
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Region
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Customers(a)
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%
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Customers(a)
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%
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Customers(a)
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%
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Europe
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80
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44.5
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%
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82
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(b)
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46.1
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%
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84
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48.3
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%
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Asia and the Pacific
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45
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25.0
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45
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25.3
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41
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23.5
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The Middle East and Africa
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25
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13.9
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22
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(b)
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12.3
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19
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10.9
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U.S. and Canada
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17
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9.4
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18
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10.1
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17
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9.8
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Central and South America and Mexico
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13
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7.2
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11
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6.2
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13
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7.5
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180
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100
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%
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178
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100
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%
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174
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100
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%
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(a)
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A customer is an airline with its own operating certificate.
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(b)
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Two customers have been reclassified from the Middle East and
Africa to Europe to reflect the new geographical boundaries of
the European Union.
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Revenues from rentals of flight equipment to foreign airlines
were $4.4 billion in 2010, $4.6 billion in 2009, and
$4.4 billion in 2008, comprising 93.6%, 92.9%, and 93.0%,
respectively, of total revenues from rentals of flight
equipment. The following table sets forth the dollar amount and
percentage of total revenues from rentals of flight equipment
attributable to the indicated geographic areas based on each
airlines principal place of business for the years
indicated:
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2010
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2009
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2008
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Amount
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%
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Amount
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%
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Amount
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%
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Europe
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$
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2,103,058
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44.5
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%
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$
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2,195,516
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(a)
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44.6
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%
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$
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2,110,239
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45.1
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%
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Asia and the Pacific
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1,455,873
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30.8
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1,503,241
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30.5
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1,372,454
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29.3
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The Middle East and Africa
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375,496
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7.9
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412,687
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(a)
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8.4
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414,493
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8.9
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U.S. and Canada
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206,396
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4.4
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228,126
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4.6
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254,603
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5.4
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Central and South America and Mexico
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585,679
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12.4
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588,683
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11.9
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527,067
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11.3
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$
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4,726,502
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(b)
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100.0
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%
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$
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4,928,253
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(b)
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100.0
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%
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$
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4,678,856
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(b)
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100.0
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%
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(a)
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Revenues from rentals of flight equipment attributable to two
countries have been reclassified from the Middle East and Africa
to Europe to reflect the new geographical boundaries of the
European Union.
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(b)
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Revenues from rentals of flight equipment have been reduced by
$478.6 million (2010), $347.0 million (2009) and
$264.6 million (2008), which was previously recorded as
Overhaul provision in expenses. See Note A of Notes to
Consolidated Financial Statements.
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Lease revenues from the rental of flight equipment have been
reduced by payments received by our customers from the aircraft
and engine manufacturers.
4
The following table sets forth revenue attributable to
individual countries representing at least 10% of total revenue
in any year indicated below based on each airlines
principal place of business for the years indicated:
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2010
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2009
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2008
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Amount
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%
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Amount
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%
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Amount
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%
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(Dollars in thousands)
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China
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$
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815,683
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17.3
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%
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$
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879,073
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18.3
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%
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$
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819,371
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17.5
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%
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France
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516,899
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10.9
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526,283
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10.9
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504,370
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10.8
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No single customer accounted for more than 10% of total revenues
in any of the years disclosed.
Competition
The leasing, remarketing and sale of jet aircraft is highly
competitive. We face competition from aircraft manufacturers,
banks, financial institutions, other leasing companies, aircraft
brokers and airlines. Competition for leasing transactions is
based on a number of factors including delivery dates, lease
rates, terms of lease, other lease provisions, aircraft
condition and the availability in the marketplace of the types
of aircraft to meet the needs of the customers. We believe we
are a strong competitor in all of these areas.
Government
Regulation
The U.S. Department of State (DOS) and the
U.S. Department of Transportation (DOT),
including the FAA, an agency of the DOT, exercise regulatory
authority over air transportation in the U.S. The DOS and
DOT, in general, have jurisdiction over the economic regulation
of air transportation, including the negotiation with foreign
governments of the rights of U.S. carriers to fly to other
countries and the rights of foreign carriers to fly to and
within the U.S.
We are not directly subject to the regulatory jurisdiction of
the DOS and DOT or their counterpart organizations in foreign
countries related to the operation of aircraft for public
transportation of passengers and property.
Our relationship with the FAA consists of the registration with
the FAA of those aircraft which we have leased to
U.S. carriers and to a number of foreign carriers where, by
agreement, the aircraft are to be registered in the
U.S. When an aircraft is not on lease, we may obtain from
the FAA, or its designated representatives, a
U.S. Certificate of Airworthiness or a ferry flight permit
for the particular aircraft.
Our involvement with the civil aviation authorities of foreign
jurisdictions consists largely of requests to register and
deregister our aircraft on those countries registries.
The U.S. Department of Commerce (DOC) exercises
regulatory authority over exports. We are subject to the
regulatory authority of the DOS and DOC as it relates to the
export of aircraft for lease and sale to foreign entities and
the export of parts to be installed on our aircraft. These
Departments have, in some cases, required us to obtain export
licenses for parts installed in aircraft exported to foreign
countries.
Through their regulations, the DOC and the Department of the
Treasury (through its Office of Foreign Assets Control) impose
restrictions on the operation of U.S. made goods, such as
aircraft and engines, in sanctioned countries. In addition, they
impose restrictions on the ability of U.S. companies to
conduct business with entities in those countries.
The Patriot Act of 2001 reinforced the authority of the
U.S. Secretary of State and the U.S. Secretary of the
Treasury to (i) designate individuals and
organizations as terrorists and terrorist supporters and to
freeze their U.S. assets and (ii) prohibit
financial transactions with U.S. persons, including
U.S. individuals, entities and charitable organizations. We
comply with the provisions of this Act and we closely monitor
our activities with foreign entities.
A bureau of the U.S. Department of Homeland Security,
U.S. Customs and Border Protection, enforces regulations
related to the import of our aircraft into the U.S. for
maintenance or lease and the importation of parts for
installation on our aircraft. We monitor our imports for
compliance with U.S. Customs regulations.
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The U.S. Bureau of Export Enforcement enforces regulations
related to the export of our aircraft to other jurisdictions and
the exportation of parts for installation of our aircraft. We
monitor our exports for compliance with the U.S. Bureau of
Export Enforcement.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank), which effects
comprehensive changes to the regulation of financial services in
the United States and will subject AIG to substantial additional
federal regulation, was signed into law. The new legislation
provides two scenarios under which the Board of Governors of the
Federal Reserve System (the FRB) could become
AIGs regulator: (i) if AIG is recognized as a
savings and loan holding company as defined by the
Home Owners Loan Act (HOLA)
and/or
(ii) if the newly created risk regulator
the Financial Stability Oversight Council designates
AIG as a company whose material financial distress, or whose
nature, scope, size, scale, concentration, interconnectedness or
mix of activities, could pose a threat to the financial
stability of the United States. If AIG becomes subject, as a
savings and loan holding company, to the examination,
enforcement and supervisory authority of the FRB, the FRB would
have authority to impose capital requirements on AIG and its
subsidiaries. We cannot predict how the FRB will exercise
potential general supervisory authority over AIG subsidiaries.
Employees
We operate in a capital intensive rather than a labor intensive
business. As of December 31, 2010, we had
194 full-time employees, which we considered adequate for
our business operations. Management and administrative personnel
will expand or contract, as necessary, to meet our future needs.
None of our employees is covered by a collective bargaining
agreement and we believe that we maintain excellent employee
relations. We provide certain employee benefits including
retirement, health, life, disability and accident insurance
plans, some of which are established and maintained by our
parent, AIG.
AIG has received TARP funds and the Office of the Special Master
for TARP Executive Compensation (Special Master) has
imposed limitations on compensation of AIGs highest paid
employees. Our Vice Chairman and President is subject to the
imposed limitations and we have three other members of our
senior management team who will be subject to the limitations in
2011.
During the year ended December 31, 2010, certain members of
our senior management team left ILFC; we have been able to
attract well qualified replacements.
Insurance
Our lessees are required to carry those types of insurance that
are customary in the air transportation industry, including
comprehensive liability insurance and aircraft hull insurance.
In general, we are an additional insured party on liability
policies carried by the lessees. We obtain certificates of
insurance from the lessees insurance brokers. All
certificates of insurance contain a breach of warranty
endorsement so that our interests are not prejudiced by any act
or omission of the operator-lessee. Lease agreements generally
require hull and liability limits to be listed in
U.S. dollars on the certificate of insurance.
Insurance premiums are paid by the lessee, with coverage
acknowledged by the broker or carrier. The territorial coverage
is, in each case, suitable for the lessees area of
operations. The certificates of insurance contain, among other
provisions, a provision prohibiting cancellation or material
change without at least 30 days advance written notice to
the insurance broker (who is obligated to give us prompt
notice), except in the case of hull war insurance policies,
which customarily only provide seven days advance written notice
for cancellation and may be subject to shorter notice under
certain market conditions. Furthermore, the insurance is primary
and not contributory, and all insurance carriers are required to
waive rights of subrogation against us.
The stipulated loss value schedule under aircraft hull insurance
policies is on an agreed value basis acceptable to us and
usually exceeds the book value of the aircraft. In cases where
we believe that the agreed value stated in the lease is not
sufficient, we purchase additional Total Loss Only coverage for
the deficiency.
Aircraft hull policies contain standard clauses covering
aircraft engines. The lessee is required to pay all deductibles.
Furthermore, the hull war policies contain full war risk
endorsements, including, but not limited to, confiscation (where
available), seizure, hijacking and similar forms of retention or
terrorist acts. The policies
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include customary exclusions such as physical damage to aircraft
hulls caused by dirty bombs, bio-hazardous materials and
electromagnetic pulsing.
The comprehensive liability insurance listed on certificates of
insurance includes provisions for bodily injury, property
damage, passenger liability, cargo liability and such other
provisions reasonably necessary in commercial passenger and
cargo airline operations. Such certificates of insurance list
combined comprehensive single liability limits of not less than
$500 million. As a result of the terrorist attacks on
September 11, 2001, the insurance market unilaterally
imposed a sublimit on each operators policy for third
party war risk liability in the amount of $50 million. We
require each lessee to purchase higher limits of third party war
risk liability or obtain an indemnity from their government.
Separately, we purchase contingent liability insurance and
contingent hull insurance on all aircraft in our fleet and
maintain other insurance covering the specific needs of our
business operations. Insurance policies are generally placed or
reinsured through AIG subsidiaries. AIG charges us directly for
these insurance costs. We believe our insurance is adequate both
as to coverage and amount.
Code of
Ethics and Conduct
Our employees are subject to AIGs Code of Conduct designed
to assure that all employees perform their duties with honesty
and integrity. In addition, our directors and officers are
subject to AIGs Director, Executive Officer, and Senior
Financial Officer Code of Business Conduct and Ethics. Both of
these Codes appear in the Corporate Governance section of
www.aigcorporate.com.
Forward-Looking
Statements
This annual report on
Form 10-K
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-K
and include statements regarding, among other matters, 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 Item 1A. Risk
Factors in this
Form 10-K.
We do not intend, and undertake no obligation to, update any
forward-looking information to reflect actual results or future
events or circumstances.
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. The numerous risks and uncertainties to which our
business is subject are described below and in the section
titled Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
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 December 31, 2010,
we had approximately $27.6 billion in principal amount of
indebtedness outstanding.
7
Our substantial level of indebtedness could have important
consequences to holders of our debt, including the following:
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making it more difficult for us to satisfy our obligations with
respect to our indebtedness;
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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;
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increasing our vulnerability to adverse economic and industry
conditions;
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limiting our flexibility in planning for, or reacting to,
changes in our business and industry; and
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limiting our ability to borrow additional funds or refinance our
existing indebtedness.
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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 borrow funds to purchase new and used flight
equipment, make progress payments during aircraft construction
and pay off maturing debt obligations. In the past, these funds
were borrowed principally on an unsecured basis from various
sources and included both public debt and bank facilities.
In 2009, we had limited access to our traditional sources of
liquidity and we borrowed $3.9 billion from AIG Funding to
fulfill our liquidity needs. In 2010, we regained access to debt
markets, to which we had limited access throughout 2009. During
the year ended December 31, 2010, we borrowed approximately
$9.8 billion through secured and unsecured financings,
which generated proceeds, net of discounts, aggregating
$9.7 billion, to support our liquidity needs in excess of
our operating cash flows. We used part of the proceeds received
from these debt issuances to prepay in full the principal
balance of $3.9 billion, plus accrued interest, of our
loans from AIG Funding, originally due in 2013. In the fourth
quarter of 2010, we also repaid in full and terminated our
$2.0 billion revolving credit facility dated
October 14, 2005 and repaid $800 million aggregate
principal amount of loans outstanding under our
$2.5 billion credit facility dated October 13, 2006.
On January 31, 2011, we entered into a new three-year
$2.0 billion unsecured revolving credit facility.
Any new issuance of debt by us or our subsidiaries will be
subject to the consent of the Department of the Treasury if,
after giving effect to the incurrence of the debt and use of
proceeds therefrom, we increase our net indebtedness by more
than $1 billion compared to the same date in the previous
year, or compared to December 8, 2010, if the measurement
is made before December 8, 2011. We cannot predict whether
the Department of the Treasury would consent to us incurring
debt in excess of this amount.
Our bank credit facilities and indentures also limit our ability
to incur secured indebtedness. The most restrictive covenant in
our bank credit facilities permits us and our subsidiaries to
incur secured indebtedness totaling up to 30% of our
consolidated net tangible assets, as defined in the credit
agreement, minus $2.0 billion, which limit currently totals
approximately $10.0 billion. As of March 4, 2011, we
were able to incur an additional $4.8 billion of secured
indebtedness under this covenant. Our debt indentures also
restrict us and our subsidiaries from incurring secured
indebtedness in excess of 12.5% of our consolidated net tangible
assets, as defined in the indentures. However, we may obtain
secured financing without regard to the 12.5% consolidated net
tangible asset limit under our indentures by doing so through
subsidiaries that qualify as non-restricted under our debt
indentures.
In addition to addressing our liquidity needs through debt
financings, we also pursue potential aircraft sales in
connection with our ongoing fleet strategy. During the year
ended December 31, 2010, we sold 59 aircraft for
approximately $2.0 billion in gross proceeds. Since
December 31, 2010, we have sold an additional four aircraft
for additional proceeds of $127.1 million. In evaluating
potential sales, we balance 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, we would need approval
from the Department of the Treasury if
8
we entered into sales transactions with aggregate consideration
exceeding $2.5 billion during any twelve-month period.
Therefore, we cannot predict whether any additional sales of
aircraft will occur.
Because the current market for aircraft is depressed due to the
economic downturn and limited availability of buyer financing,
sales of aircraft 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 our 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 may, or may not, continue to have access to the secured or
unsecured debt markets in the future or be able to sell
additional aircraft. We believe that our cash on hand, including
cash generated from the above-mentioned financing arrangements,
and cash flows generated from operations, which include aircraft
sales, are sufficient for us to operate our business and repay
our maturing debt obligations for the next twelve months. If we
are unable to generate or raise sufficient cash, 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.
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. Our
credit rating downgrades, combined with externally generated
volatility, limited our ability to access debt markets and
resulted in higher funding costs. Although we began to regain
access to the debt markets in 2010, further ratings downgrades
could increase our borrowing costs and limit our access to the
debt markets.
Additionally, our current long-term debt ratings impose the
following restrictions under our 2004 ECA facility:
(i) we must segregate all security deposits,
overhaul rentals and rental payments related to the aircraft
financed under our 2004 ECA facility into separate accounts
controlled by the security trustee (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 the 2004 ECA
facility in the local jurisdictions in which the respective
aircraft are registered. At December 31, 2010, the same
restrictions applied to our 1999 ECA facility, but subsequent to
December 31, 2010, we repaid in full all of the loans that
were outstanding under the 1999 ECA facility. At March 4,
2011, there are no amounts outstanding under the 1999 ECA
facility. At December 31, 2010, we had segregated security
deposits, overhaul rentals and rental payments aggregating
approximately $393.7 million related to aircraft funded
under the 1999 and 2004 ECA facilities, of which
$12.5 million was returned to us subsequent to
December 31, 2010, after we repaid in full all of the loans
that were outstanding under the 1999 ECA facility.
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 varying debt
maturities.
Our cost of borrowing for new financings has increased 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. In the fourth quarter of 2010, using available cash on
hand, we (i) repaid in full $2.0 billion
in principal amount outstanding plus accrued interest under our
$2.0 billion credit agreement dated October 14, 2005,
and (ii) repaid $800 million aggregate
principal amount of loans outstanding under our
$2.5 billion credit agreement dated October 13, 2006,
in connection with other amendments to that credit agreement.
These obligations had interest rates of 0.91% and 3.25%,
respectively, at the time of their respective repayment.
Subsequent to repayment of these obligations, as well as
repayments of other scheduled maturities, our composite interest
rate increased from 5.17% at September 30, 2010, to 5.66%
at December 31, 2010. We expect our composite interest rate
to increase further as our lower cost financings mature. A 1%
increase in our composite
9
interest rate at December 31, 2010, would have increased
our interest expense by approximately $280 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:
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incur debt;
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encumber our assets;
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dispose of certain assets;
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consolidate, merge, sell or otherwise dispose of all or
substantially all of our assets;
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enter into sale-leaseback transactions;
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make equity or debt investments in other parties;
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enter into transactions with affiliates;
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make capital expenditures;
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designate our subsidiaries as unrestricted subsidiaries; and
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pay dividends and distributions.
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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 Master Transaction Agreement with the Department of the
Treasury Although we are not a party to the
Master Transaction Agreement that AIG entered into on
December 8, 2010, with the Department of the Treasury (the
Master Transaction Agreement), we are a Designated
Entity under the agreement, and we and our subsidiaries are
restricted from taking certain significant actions without
obtaining prior written consent from the Department of the
Treasury under the agreement, including:
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amending or waiving any provisions of our articles of
incorporation, bylaws, or similar organizational document in a
manner that would adversely affect, in any material respect, the
rights of our equity interests;
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authorizing or issuing any equity interests, unless to AIG, or a
wholly-owned subsidiary of AIG;
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selling or disposing of assets for total consideration greater
than or equal to $2.5 billion in any twelve-month period;
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acquiring assets after December 8, 2010, other than
pursuant to existing purchase commitments at such date, with
aggregate scheduled payments under the purchase contracts for
such assets greater than or equal to $2.5 billion in any
twelve-month period;
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engaging in any public offering or other sale or transfer of our
equity interests;
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voluntarily liquidating, filing for bankruptcy, or taking any
other legal action evidencing insolvency; and
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increasing our net indebtedness by more than $1 billion
compared to the same date in the previous year, or compared to
December 8, 2010, if the measurement is made before
December 8, 2011.
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Additionally, under the Master Transaction Agreement, if AIG has
not repaid certain loans to the Department of Treasury by
May 1, 2013, the Department of the Treasury may direct AIG
to sell certain assets, including shares of ILFC.
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.
10
Key
Personnel Risk
Our senior managements reputation and relationships with
lessees and sellers of aircraft are an important element of our
business. The American Recovery and Reinvestment Act of 2009
(the Act) imposed restrictions on bonus and other
incentive compensation payable to certain AIG employees. Our
President and Vice Chairman has been subject to the compensation
limitations imposed by the Act since 2009 and three other
members of our senior management team will become subject to the
limitations in 2011. The restrictions and limitations on
compensation imposed on us may adversely affect our ability to
attract new talent and retain and motivate our existing impacted
employees. If we are unable to retain our key employees due to
the compensation restrictions or for any other reason, and we
fail to attract new talent, it could negatively impact our
ability to conduct business.
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:
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demand for air travel
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geopolitical events
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competition between carriers
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security, terrorism and war
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fuel prices and availability
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worldwide health concerns
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labor costs and stoppages
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equity and borrowing capacity
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maintenance costs
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environmental concerns
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employee labor contracts
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government regulation
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air traffic control infrastructure
constraints
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interest rates
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airport access
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overcapacity
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insurance costs and coverage
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natural disasters
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heavy reliance on automated systems
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To the extent that our customers are affected by these risk
factors, we may experience:
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lower demand for the aircraft in our fleet and, generally,
reduced market lease rates and lease margins;
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a higher incidence of lessee defaults, lease restructurings and
repossessions affecting net income due to maintenance
obligations under aircraft liens and tariffs, 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;
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a higher incidence of situations where we engage in
restructuring lease rates for our troubled customers which
reduces overall lease revenue;
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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
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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.
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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.
11
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 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. Should the manufacturers fail to respond appropriately to
changes in the market environment or fail to fulfill their
contractual obligations, we may experience:
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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;
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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;
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a marketplace with too many aircraft available, creating
downward pressure on demand for the aircraft in our fleet and
reduced market lease rates; and
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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.
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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 with
customers for 37 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 December 31, 2010,
there have been no cancellations by any party related to the
delays. We are in discussions with Boeing related to revisions
to the delivery schedule and potential delay compensation for
which we may be eligible.
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. During the
twelve months ended December 31, 2010, we took impairment
charges aggregating approximately $948.7 million related to
our fleet held for use and additional impairment charges and
fair value adjustments aggregating $550.0 million related
to aircraft we sold, held for sale, had agreed to sell or
designated for part-out. See Notes D of Notes to
Consolidated Financial Statements. 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.
In 2010 we recorded impairment charges on certain aircraft types
due to unfavorable trends affecting the airline industry in
general and specific models of aircraft, including the potential
for lower demand for certain aircraft models as a result of the
announcement from Airbus of new, efficient engine options for
its future narrow body aircraft. See Note D of Notes to
Consolidated Financial Statements.
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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 In August 2010 the
Financial Accounting Standards Board (FASB) issued
an Exposure Draft that proposes substantial changes to existing
lease accounting that will affect all lease arrangements. The
FASBs proposal requires that all leases be recorded on the
statement of financial position of both lessees and lessors.
Under the proposed accounting model, lessees will be required to
record an asset representing the
right-to-use
the leased item for the lease term
(Right-of-Use
Asset) and a liability to make lease payments. The
Right-of-Use
asset and liability incorporate the rights, including renewal
options, and obligations, including contingent payments and
termination payments, arising under the lease and are based on
the lessees assessment of expected payments to be made
over the lease term. The proposed model requires measuring these
amounts at the present value of the future expected payments.
Under the proposed accounting model, lessors will apply one of
two approaches to each lease based on whether the lessor retains
exposure to significant risks or benefits associated with the
underlying asset, as defined. The performance obligation
approach will be applied when the lessor has retained exposure
to significant risks or benefits associated with the underlying
lease, and the de-recognition approach will apply when the
lessor does not retain significant risks or benefits associated
with the underlying asset.
The comment period for this proposal ended in December 2010 and
the FASB intends to issue a final standard in 2011. The proposal
does not include a proposed effective date; rather it is
expected to be considered as part of the evaluation of the
effective dates for the major projects currently undertaken by
the FASB. The FASB continues to deliberate on the proposed
accounting as presented in the Exposure Draft. In subsequent
meetings in January and February 2011, the FASB discussed and
agreed to make substantial revisions to the proposed accounting
in the Exposure Draft. These affect both lessees and lessors. As
a result, currently management is unable to assess the effects
the adoption of the new finalized lease standard will have on
our financial statements. Although we believe the presentation
of our financial statements, and those of our lessees, could
change, we do not believe the accounting pronouncement will
change the fundamental economic reasons for which the airlines
lease aircraft. Therefore, we do not believe it will have a
material impact on our business.
Tax Related Risk We operate in multiple
jurisdictions and may become subject to a wide range of income
and other taxes. If we are unable to execute our business in
jurisdictions with preferential tax treatment, we may be subject
to significant income and other taxes on operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
Flight
Equipment
Management frequently reviews opportunities to acquire suitable
commercial jet aircraft based not only on market demand and
customer airline requirements, but also on our fleet portfolio
mix, leasing strategies, and likely timeline for development of
future aircraft. Before committing to purchase specific
aircraft, management takes into
13
consideration factors such as estimates of future values,
potential for remarketing, trends in supply and demand for the
particular type, make and model of aircraft and engines, trends
in local, regional, and worldwide air travel, fuel economy,
environmental considerations (e.g., nitrogen oxide emissions,
noise standards), operating costs, and anticipated obsolescence.
At December 31, 2010, the average age of aircraft in our
fleet was 8.5 years.
The following table shows the scheduled lease terminations (for
the minimum noncancelable period which does not include
contracted unexercised lease extension options) by aircraft type
for our operating lease portfolio at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
|
737-300/400/500
|
|
|
7
|
|
|
|
10
|
|
|
|
14
|
|
|
|
12
|
|
|
|
8
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
737-600/700/800
|
|
|
15
|
|
|
|
37
|
|
|
|
29
|
|
|
|
22
|
|
|
|
24
|
|
|
|
30
|
|
|
|
19
|
|
|
|
6
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
185
|
|
757-200
|
|
|
5
|
|
|
|
15
|
|
|
|
11
|
|
|
|
16
|
|
|
|
9
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
767-200
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
767-300
|
|
|
2
|
|
|
|
7
|
|
|
|
13
|
|
|
|
11
|
|
|
|
11
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
777-200
|
|
|
|
|
|
|
10
|
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
777-300
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
1
|
|
|
|
32
|
|
747-400
|
|
|
3
|
|
|
|
7
|
|
|
|
2
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
MD-11
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
A300-600R/F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
A310
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
A319
|
|
|
1
|
|
|
|
10
|
|
|
|
17
|
|
|
|
20
|
|
|
|
19
|
|
|
|
19
|
|
|
|
17
|
|
|
|
6
|
|
|
|
8
|
|
|
|
1
|
|
|
|
2
|
|
|
|
120
|
|
A320
|
|
|
9
|
|
|
|
20
|
|
|
|
21
|
|
|
|
24
|
|
|
|
25
|
|
|
|
42
|
|
|
|
8
|
|
|
|
5
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
163
|
|
A321
|
|
|
4
|
|
|
|
4
|
|
|
|
5
|
|
|
|
27
|
|
|
|
7
|
|
|
|
24
|
|
|
|
7
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
83
|
|
A330-200
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
|
|
8
|
|
|
|
6
|
|
|
|
9
|
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
61
|
|
A330-300
|
|
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
2
|
|
|
|
10
|
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
A340-300
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
A340-600
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
49
|
|
|
|
137
|
|
|
|
149
|
|
|
|
168
|
|
|
|
130
|
|
|
|
140
|
|
|
|
82
|
|
|
|
39
|
|
|
|
27
|
|
|
|
8
|
|
|
|
4
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 4, 2011, leases covering 21 of the 49 aircraft
with lease expiration dates in 2011 had been extended or leased
to other customers, and one aircraft is more likely than not to
be sold during 2011.
Commitments
At December 31, 2010, we had committed to purchase the
following new aircraft at an estimated aggregate purchase price
(including adjustment for anticipated inflation) of
approximately $13.5 billion for delivery as shown below.
The recorded basis of aircraft may be adjusted upon delivery to
reflect credits given by the manufacturers in connection with
the leasing of aircraft.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Total
|
|
|
737-700/800(a)
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
787-8/9(a)(b)
|
|
|
|
|
|
|
4
|
|
|
|
10
|
|
|
|
7
|
|
|
|
3
|
|
|
|
5
|
|
|
|
12
|
|
|
|
17
|
|
|
|
16
|
|
|
|
74
|
|
A320-200(a)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
A350XWB-800/900(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
A380-800(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6
|
|
|
|
9
|
|
|
|
10
|
|
|
|
14
|
|
|
|
10
|
|
|
|
15
|
|
|
|
18
|
|
|
|
17
|
|
|
|
16
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We have the right to designate the
size of the aircraft within the specific model type at specific
dates prior to contractual delivery.
|
|
(b)
|
|
Pending official notice from Boeing
related to firm delivery dates, we anticipate the first delivery
to be delayed to the first quarter of 2013.
|
|
(c)
|
|
As of March 2011, we are no longer
required to take delivery of the A380s on order.
|
We anticipate that a portion of the aggregate purchase price
will be funded by incurring additional debt. The exact amount of
the indebtedness to be incurred will depend, in part, upon the
actual purchase price of the aircraft, which can vary due to a
number of factors, including inflation.
The new aircraft listed above are being purchased pursuant to
purchase agreements with each of Boeing and Airbus. These
agreements establish the pricing formulas (which include certain
price adjustments based upon
14
inflation and other factors) and various other terms with
respect to the purchase of aircraft. Under certain
circumstances, we have the right to alter the mix of aircraft
type ultimately acquired. As of December 31, 2010, we had
made non-refundable deposits (exclusive of capitalized interest)
with respect to the aircraft which we have committed to purchase
of approximately $118.6 million with Boeing and
$23.1 million with Airbus. In the first quarter of 2011, we
signed a memorandum of understanding to purchase
75 A320neos and 25 A321neos from Airbus, which will
replace our previous A380 commitments, and a purchase agreement
for
33 737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019.
As of March 4, 2011, we had entered into contracts for the
lease of new aircraft scheduled to be delivered through 2019 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Number
|
|
|
Delivery Year
|
|
Aircraft(a)
|
|
Leased
|
|
% Leased
|
|
2011
|
|
|
6
|
|
|
|
6
|
|
|
|
100
|
%
|
2012
|
|
|
9
|
|
|
|
8
|
|
|
|
89
|
|
2013
|
|
|
10
|
|
|
|
10
|
|
|
|
100
|
|
2014
|
|
|
14
|
|
|
|
9
|
|
|
|
64
|
|
2015
|
|
|
10
|
|
|
|
7
|
|
|
|
70
|
|
Thereafter
|
|
|
66
|
|
|
|
9
|
|
|
|
14
|
|
We will need to find customers for aircraft presently on order,
and for any new aircraft ordered, and not subject to a lease or
sale contract, and we will need to arrange financing for
portions of the purchase price of such equipment. Although we
have been successful to date in placing new aircraft on lease
and have been able to obtain adequate financing in the past,
there can be no assurance as to the future continued
availability of lessees or of sufficient amounts of financing on
acceptable terms.
Facilities
Our principal offices are located at 10250 Constellation Blvd.,
Suite 3400, Los Angeles, California 90067. We occupy space
under a lease which expires in 2015. As of December 31,
2010, we occupied approximately 127,000 square feet of
office space. Starting in March 2009, we leased an additional
22,000 square feet, which is subleased to third parties.
|
|
Item 3.
|
Legal
Proceedings
|
Flash Airlines, Yemen Airways-Yemenia and Airblue
Limited: We are named in lawsuits in connection
with the 2004 crash of our Boeing
737-300
aircraft on lease to Flash Airlines, an Egyptian carrier; the
2009 crash of our Airbus A310-300 aircraft on lease to Yemen
Airways-Yemenia, a Yemeni carrier; and the 2010 crash of our
Airbus A320-200 aircraft on lease to Airblue Limited, a
Pakistani carrier. These lawsuits were filed by the families of
victims on the flights and seek unspecified damages for wrongful
death, costs, and fees. The Flash Airlines litigation originally
commenced in May 2004 in California, but all
U.S. proceedings were dismissed in favor of proceedings in
France where claims are pending before the Tribunal de Grande
Instance civil courts in Bobigny and Paris. As of March 4,
2011, the parties are engaged in settlement negotiations. We
believe that we have substantial defenses to this action and
available liability insurance is adequate to cover our defense
costs and any potential liability. The Yemen Airways litigation
was filed in January 2011 in California Superior Court in Los
Angeles County. We have been served with the complaint and the
litigation is in its incipient stages. While plaintiffs have not
specified any amount of damages, we believe that we are
adequately covered by available liability insurance and that we
have substantial defenses to this action. The Airblue Limited
litigation commenced in Cook County, Illinois in September 2010.
The case was removed to the U.S. district court for the
Northern District of Illinois and plaintiffs voluntarily
dismissed their claims without prejudice. We do not believe that
the outcome of any of these lawsuits will have a material effect
on our consolidated financial condition, results of operations
or cash flows.
15
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 are currently engaged in settlement negotiations and
at December 31, 2010, we had accrued the proposed
settlement amount in our consolidated financial statements. We
do not expect any settlement payment to be material to our
consolidated financial position, results of operations or cash
flows.
Krasnoyarsk Airlines: We leased a
757-200ER
aircraft to a Russian airline, KrasAir, which became the subject
of a Russian bankruptcy-like proceeding. The aircraft was
detained by the Russian customs authorities on the basis of
certain alleged violations of the Russian customs code by
KrasAir. While we prevailed in court proceedings, Russian custom
authorities would not provide relevant documents to permit the
aircraft to be removed from Russia. Therefore, we took
possession of the engines only, and recorded impairment charges
in the amount of $20.8 million for the year ended
December 31, 2010, to reduce the value of the aircraft to
the fair value of the engines. We do not intend to pursue the
return of this aircraft further.
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.
16
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
We are an indirect wholly-owned subsidiary of AIG and our common
stock is not listed on any national exchange or traded in any
established market. We did not pay any dividends on our common
stock in 2010 or 2009. Under the most restrictive provision of
our debt agreements, we may declare and pay dividends of up to
$1.9 billion of our consolidated retained earnings. Under
certain of our debt agreements, we are currently restricted from
using proceeds from asset sales to pay dividends to AIG but may
use other funds to pay such dividends.
|
|
Item 6.
|
Selected
Financial Data
|
The following table summarizes selected consolidated financial
data and certain operating information of the Company. The
selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
Consolidated Financial Statements and accompanying notes
included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollar amounts in thousands)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals of flight equipment(a)
|
|
$
|
4,726,502
|
|
|
$
|
4,928,253
|
|
|
$
|
4,678,856
|
|
|
$
|
4,297,477
|
|
|
$
|
3,735,767
|
|
Flight equipment marketing and gain on aircraft sales
|
|
|
10,637
|
|
|
|
15,536
|
|
|
|
46,838
|
|
|
|
30,613
|
|
|
|
71,445
|
|
Interest and other income
|
|
|
61,741
|
|
|
|
58,209
|
|
|
|
98,260
|
|
|
|
111,599
|
|
|
|
86,304
|
|
Total revenues(a)
|
|
|
4,798,880
|
|
|
|
5,001,998
|
|
|
|
4,823,954
|
|
|
|
4,439,689
|
|
|
|
3,893,516
|
|
Aircraft impairment charges and fair value adjustments
|
|
|
1,498,713
|
|
|
|
87,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
3,892,035
|
|
|
|
3,518,163
|
|
|
|
3,729,233
|
|
|
|
3,524,804
|
|
|
|
3,177,409
|
|
Total expenses(a)
|
|
|
5,390,748
|
|
|
|
3,605,831
|
|
|
|
3,729,233
|
|
|
|
3,524,804
|
|
|
|
3,177,409
|
|
(Loss) income before income taxes
|
|
|
(591,868
|
)
|
|
|
1,396,167
|
|
|
|
1,094,721
|
|
|
|
914,885
|
|
|
|
716,107
|
|
Net (loss) income
|
|
|
(383,758
|
)
|
|
|
895,629
|
|
|
|
703,125
|
|
|
|
604,366
|
|
|
|
499,267
|
|
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends(b):
|
|
|
|
(b)
|
|
|
2.00
|
x
|
|
|
1.66
|
x
|
|
|
1.52
|
x
|
|
|
1.43
|
x
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment under operating leases (net of accumulated
depreciation)
|
|
$
|
38,526,165
|
|
|
$
|
43,929,801
|
|
|
$
|
43,220,139
|
|
|
$
|
41,797,660
|
|
|
|
38,475,949
|
|
Net investment in finance and sales-type leases
|
|
|
67,620
|
|
|
|
261,081
|
|
|
|
301,759
|
|
|
|
307,083
|
|
|
|
283,386
|
|
Total assets
|
|
|
43,318,846
|
|
|
|
45,967,042
|
|
|
|
47,315,514
|
|
|
|
44,830,590
|
|
|
|
42,035,528
|
|
Total secured debt(c)
|
|
|
9,556,634
|
|
|
|
7,067,446
|
|
|
|
2,436,296
|
|
|
|
3,625,274
|
|
|
|
3,818,688
|
|
Total unsecured debt(d)
|
|
|
17,997,466
|
|
|
|
22,644,293
|
|
|
|
30,040,372
|
|
|
|
26,826,005
|
|
|
|
25,041,554
|
|
Shareholders equity
|
|
|
8,232,004
|
|
|
|
8,550,176
|
|
|
|
7,625,213
|
|
|
|
7,028,779
|
|
|
|
6,574,998
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft lease portfolio at period end(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
933
|
|
|
|
993
|
|
|
|
955
|
|
|
|
900
|
|
|
|
824
|
|
Subject to finance and sales-type leases
|
|
|
4
|
|
|
|
11
|
|
|
|
9
|
|
|
|
9
|
|
|
|
10
|
|
Aircraft sold or remarketed during the period
|
|
|
59
|
|
|
|
9
|
|
|
|
11
|
|
|
|
9
|
|
|
|
21
|
|
|
|
(a) |
Presented net of estimated reimbursements of overhaul rentals in
the amounts of $478.6 million (2010), $347.0 million
(2009), $264.6 million (2008), $290.1 million
(2007) and $249.2 million (2006). Prior period amounts
previously recorded as Provision for overhauls were reclassified
as a reduction of Rentals of flight equipment to conform to
current period presentation.
|
|
|
(b) |
See Exhibit 12. In the twelve months ended
December 31, 2010, earnings were insufficient to cover
fixed charges by $598.4 million due to non-cash aircraft
impairment charges and fair value adjustments aggregating
$1.5 billion and lease related charges aggregating
$91.2 million.
|
|
|
(c) |
Includes subordinated debt and loans from AIG Funding when
applicable. We repaid the loan to AIG Funding in 2010.
|
|
|
(d) |
Does not include foreign currency adjustment related to foreign
currency denominated debt swapped into US dollars.
|
|
|
(e) |
See Item 2. Properties Flight
Equipment.
|
17
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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 generate the majority of our revenues from leasing new and
used commercial jet aircraft to foreign and domestic airlines.
We also generate revenues from: (i) remarketing
commercial jet aircraft for our own account when we sell our
leased aircraft at or before the expiration of their leases;
(ii) providing fleet management services to leasing,
re-leasing and sales services on behalf of the owner of
aircraft; and (iii) fees received in exchange for
providing asset value guarantees on aircraft and, in limited
circumstances, loan guarantees to buyers of aircraft or to
financial institutions.
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. As a result of the general economic
conditions and circumstances specific to AIG, our long-term debt
ratings dropped and we became unable to access the debt capital
markets and relied primarily on loans from AIG Funding. In 2010,
we saw significant improvements in these conditions and regained
access to the debt markets, as further discussed under
Debt Financings below.
In 2011, we intend to focus on the following items, with the
primary objective of improving our credit rating:
|
|
|
|
|
transitioning our focus from liquidity to long-term capital
strategy as we further strengthen our already diversified
financing profile and re-establish backup sources of liquidity;
|
|
|
|
implementing a long-term portfolio strategy which may include
the acquisition of new aircraft to support airlines
comprehensive fleet solutions while selling some of our existing
aircraft from time to time; and
|
|
|
|
focusing on our customers through increased interaction,
including the opening of regional offices, to further enhance
our marketing performance.
|
Operating
Results
We reported a net loss of approximately $383.8 million for
the year ended December 31, 2010, compared to net income of
approximately $895.6 million for the year ended
December 31, 2009. The loss reported for the year ended
December 31, 2010 was primarily due to the following:
(i) impairment charges and fair value adjustments
and other lease related charges on aircraft we sold or agreed to
sell during 2010 to generate liquidity to repay maturing debt
obligations or as part of our ongoing fleet strategy;
(ii) impairment charges related to our fleet held
for use; and (iii) an increase in our cost of
borrowing.
Impairment charges and fair value adjustments of aircraft
sold, agreed to be sold, held for sale or designated for
part-out: Due to unfavorable market conditions in
2010, we recorded impairment charges and fair value adjustments
aggregating approximately $550.0 million and lease related
charges aggregating approximately $91.2 million related to
aircraft agreed to be sold, held for sale or designated for
part-out for the year ended December 31, 2010. We recorded
impairment charges and fair value adjustments for the following
events in 2010: (i) we reclassified 60 aircraft that
we intended to sell, primarily to generate liquidity, from
Flight equipment under operating leases into Flight equipment
held for sale and completed the sale of 51 of those aircraft
during 2010; (ii) we identified another 15 aircraft
as likely to be sold as part of our ongoing fleet strategy, and
completed the sale of eight of those aircraft during 2010, two
of which were accounted for as sales-type leases; and
(iii) we designated two aircraft for part-out.
At December 31, 2010, we had nine aircraft classified as
Flight equipment held for sale and expect to complete most of
the sales during the first quarter of 2011. As of March 4,
2011, we had completed the sale of four of the remaining nine
aircraft. The 60 aircraft transferred from our fleet held for
use to Flight equipment held for sale during the year ended
December 31, 2010, generated aggregate quarterly lease
revenue of approximately $75 million and the quarterly
depreciation aggregated approximately $27 million.
18
Impairment of our fleet held for use: For the
year ended December 31, 2010, we recorded impairment
charges aggregating approximately $948.7 million related to
78 aircraft, as part of our ongoing recoverability assessments.
The impairment charges primarily resulted from changes in
managements outlook related to the future recovery of the
airline industry due to a decrease in future estimated demand
for certain aircraft types, expected increased volatility in
fuel costs and changes in other macroeconomic conditions, which,
when aggregated, resulted in lower future estimated lease rates.
See Our Fleet and Aircraft Industry and Sources of
Revenue below for a more detailed discussion.
During the years ended December 31, 2010 and 2009, we
recorded the following impairment charges and fair value
adjustments. We did not record any impairment charges or fair
value adjustments for the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
Charges and
|
|
|
|
|
|
Charges and
|
|
|
|
Aircraft
|
|
|
Fair Value
|
|
|
Aircraft
|
|
|
Fair Value
|
|
|
|
Impaired
|
|
|
Adjustments
|
|
|
Impaired
|
|
|
Adjustments
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Impairment charges and fair value adjustments on Flight
equipment held for sale or aircraft designated for part-out
|
|
|
62
|
|
|
$
|
(394.9
|
)
|
|
|
2
|
|
|
$
|
(10.6
|
)
|
Impairment charges and fair value adjustments of aircraft likely
to be sold or sold
|
|
|
15
|
|
|
|
(155.1
|
)
|
|
|
5
|
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Impairment charges and fair value adjustments on flight
equipment sold or to be disposed of
|
|
|
77
|
|
|
|
(550.0
|
)
|
|
|
7
|
|
|
|
(34.7
|
)
|
Impairment charges on aircraft held for use due to Airbus
announcement of its neo aircraft
|
|
|
61
|
|
|
|
(557.4
|
)
|
|
|
0
|
|
|
|
0
|
|
Impairment charges on aircraft held for use due to recurring
assessments
|
|
|
17
|
|
|
|
(391.3
|
)
|
|
|
3
|
|
|
|
(52.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Impairment charges on flight equipment held for use
|
|
|
78
|
|
|
|
(948.7
|
)
|
|
|
3
|
|
|
|
(52.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Impairment charges and fair value adjustments on flight
equipment
|
|
|
155
|
|
|
$
|
(1,498.7
|
)
|
|
|
10
|
|
|
$
|
(87.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of borrowing: Our cost of borrowing is
increasing as we pay down or refinance our existing debt with
new financing arrangements, reflecting higher interest rates
caused by our lower long-term debt ratings. Our average
composite interest rate for the year ended December 31,
2010, increased by 0.6% as compared to the year ended
December 31, 2009. Our average debt outstanding decreased
by approximately $2.4 billion for the year ended
December 31, 2010, as compared to the year ended
December 31, 2009. We expect our future composite interest
rate to increase further as our lower cost financings mature.
Our
Fleet
As of December 31, 2010, we owned 933 aircraft, had four
additional aircraft in the fleet classified as finance and
sales-type leases, and provided fleet management services for 97
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. We did not enter into any new purchase
agreements with manufacturers during 2010.
In the first quarter of 2011, we signed a memorandum of
understanding to purchase 75 A320neos and 25 A321neos from
Airbus, which will replace our previous A380 commitments, and a
purchase agreement for 33
737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019.
19
During the year ended December 31, 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(a)
|
|
|
(8
|
)
|
Aircraft transferred to Flight equipment held for sale(b)
|
|
|
(60
|
)
|
Aircraft designated for part-out
|
|
|
(2
|
)
|
Total loss
|
|
|
(2
|
)
|
|
|
|
|
|
Flight equipment under operating leases at December 31, 2010
|
|
|
933
|
|
|
|
|
|
|
(a) Includes two aircraft that were converted to
sales-type leases.
(b) As of December 30, 2010, 51 of these
aircraft were sold to third parties.
During 2010, four of our lessees filed for bankruptcy protection
or ceased operations: (i) Skyservice Airlines Inc.,
operating one of our owned aircraft, ceased operations on
March 31, 2010; (ii) Mexicana de
Aviación, operating 12 of our owned aircraft, of which
eight were leased from us and four were subleased from another
one of our customers, filed for bankruptcy protection on
August 2, 2010; (iii) Viking Airlines AB,
operating one of our owned aircraft, ceased operations on
October 15, 2010; and (iv) Eurocypria Airlines
Limited, operating five of our owned aircraft, ceased operations
on November 4, 2010. As of March 4, 2011, we had sold
one of these aircraft and all the remaining aircraft previously
leased directly from us had been leased to other airlines, while
the four aircraft that were subleased remained on lease with the
sublessor airline. All aircraft in our fleet were subject to
lease agreements or letters of intent at December 31, 2010.
We typically contract to re-lease aircraft before the end of the
existing lease term and 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, which 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 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 aircraft that are less in demand and have lower
lease rates. As of December 31, 2010, we identified 63
aircraft that were most susceptible to failing the
recoverability assessment. Of the 63 aircraft identified, two
aircraft did not pass the full undiscounted recoverability
assessment and a corresponding impairment was recognized for the
year ended December 31, 2010. The remaining 61 aircraft
passed the recoverability assessment with undiscounted cash
flows exceeding the carrying value of aircraft from 0.2% to 197%
which represents a 22% aggregate excess above the aggregate net
carrying value of those aircraft. These 61 aircraft had an
aggregate net carrying value of approximately $3.4 billion
at December 31, 2010. Management believes that the carrying
values at December 31, 2010, of these, as well as all our
other aircraft, are supported by the estimated future
undiscounted cash flows expected to be generated by each
aircraft.
As of December 31, 2010, ILFC had 13 passenger configured
747-400s
and 11 A321-100s in its fleet. Managements estimate
of the future lease rates for these aircraft types declined
significantly in the third quarter of 2010. The decline in
expected lease rates for the
747-400s
was due to a number of unfavorable trends, including lower
overall demand, as airlines replace their
747-400s
with more efficient newer generation wide-body aircraft. As a
result, the current global supply of
747-400
aircraft that are for sale, or idle, has increased. It is
expected that these unfavorable trends will persist. The decline
in A321-100 lease rates is primarily due to continued and
accelerated decrease in demand for this aircraft type, which is
attributable to its age and limited mission application. As a
result of the decline in expected future lease rates, seven
747-400s,
five A321-100s, and five other aircraft, including the two
discussed above, in our fleet held for use were deemed impaired
when we performed our recoverability assessments of the entire
fleet we held for use during 2010. As a result, we recorded
impairment
20
charges aggregating $391.3 million to write these aircraft
down to their respective fair values. The estimated undiscounted
cash flows on the remaining six
747-400s
and six A321-100s support the current carrying value of
these aircraft. See Note D of Notes to Consolidated
Financial Statements.
On December 1, 2010, Airbus announced new fuel efficient
engine options for its narrow body neo aircraft with expected
deliveries starting in 2016. At December 31, 2010, we had
identified 78 narrow body aircraft with first generation engines
in our fleet that may be negatively impacted by the introduction
of the neo and, as part of our on-going fleet assessment, we
performed a recoverability analysis on those aircraft, using
revised cash flow assumptions. Based on this recoverability
analysis, 61 of these 78 aircraft were deemed impaired and we
recorded impairment charges of approximately $557.4 million
for the three months ended December 31, 2010.
For the year ended December 31, 2010, as discussed in
detail above, we recorded aggregate impairment charges of
approximately $948.7 million related to 78 aircraft in our
fleet held for use. The impairment charges reflect
managements outlook related to the future recovery of the
airline industry, a decrease in demand for certain aircraft
types, expected increased volatility in fuel costs and changes
in other macroeconomic factors which, when aggregated, resulted
in lower future estimated lease rates on certain aircraft. We
also recorded impairment charges and fair value adjustments
aggregating $550.0 million related to aircraft sold, likely
to be sold or reclassified as Flight equipment held for sale for
the year ended December 31, 2010, as discussed above under
Operating Results.
There are lags between changes in market conditions and their
impact on our results, as contracts not yet reflecting current
lease rates remain in effect. Therefore, the current market
conditions and any potential effect they may have on our results
may not yet be fully reflected in our current results.
Management monitors all lessees that are behind in lease
payments and discusses relevant operational and financial issues
faced by the lessees with our marketing executives in order to
determine the amount of rental income to recognize for past due
amounts. Our customers make lease payments in advance and we
generally recognize rental income only to the extent we have
received payments or hold security deposits. At
December 31, 2010, eight customers operating 22 aircraft
were two or more months past due on $11.1 million of lease
payments related to some of those aircraft. Of this amount, we
recognized $10.1 million in rental income through
December 31, 2010, and as of March 4, 2011, we had
collected $6.0 million thereof. In comparison, at
December 31, 2009, 12 customers operating 25 aircraft were
two or more months past due on $31.9 million of lease
payments relating to some of those aircraft.
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 with our marketing
executives relevant operational and financial issues faced by
the lessees. As of December 31, 2010, customers with
$1.3 million carrying value of notes receivable were two
months or more behind on principal and interest payments
totaling $0.7 million.
Aircraft
Industry 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, terrorist activities, changes
in national policy, competitive pressures, labor actions, pilot
shortages, insurance costs, recessions, health concerns, natural
disasters, 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 year ended
December 31, 2010.
The Middle East and Northern Africa have recently experienced
political unrest due to antigovernment protests. We have 71
aircraft on lease in the region. The airlines in the region
continue to operate these 71 aircraft and the unrest has had no
significant impact on our operating results to date.
In the second half of 2010, there were notable improvements in
passenger and freight traffic resulting in an increase in demand
for aircraft subject to operating leases. This resulted in
higher lease rates for ILFCs most in-
21
demand aircraft. Currently, our customers are increasingly
willing to extend their existing leases. We believe that the
worst of this cyclical downturn has passed and that our
business, and that of our customers, will continue to improve
during 2011. Nevertheless, we believe growth will remain
vulnerable to increasing fuel costs and other political and
economic disruptions.
Despite industry cyclicality and current financial stress, we
are optimistic about the long-term future of air transportation
and, more specifically, the growing role that the leasing
industry, and ILFC specifically, provides in the fleet
transactions necessary to facilitate the growth of commercial
air transport. We believe that airlines will continue to value
the fleet flexibility offered by leasing aircraft. We also
expect lease rates for certain aircraft to begin to stabilize
and improve, which we believe could result in some recovery in
market values of aircraft. At March 4, 2011, we have signed
leases for all of our new aircraft deliveries on order at
December 31, 2010 through the end of August 2012.
Furthermore, in the first quarter of 2011, we signed a
memorandum of understanding to purchase 75 A320neos and 25
A321neos from Airbus, which will replace our previous A380
commitments, and a purchase agreement for 33
737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019. For these reasons, we
believe we are well positioned to manage the current cycle and
to take advantage of improving market conditions.
Liquidity
During 2010, we regained access to debt markets, to which we had
limited access throughout 2009. During the year ended
December 31, 2010, we borrowed approximately
$9.8 billion through secured and unsecured financings,
which generated proceeds, net of discounts, aggregating
$9.7 billion, to support our liquidity needs in excess of
our operating cash flows. We used part of the proceeds received
from these debt issuances to prepay in full the principal
balance of $3.9 billion, plus accrued interest, of our
loans from AIG Funding, originally due in 2013. In the fourth
quarter of 2010, we also repaid in full and terminated our
$2.0 billion revolving credit facility dated
October 14, 2005 and repaid $800 million aggregate
principal amount of loans outstanding under our
$2.5 billion credit facility dated October 13, 2006.
On January 31, 2011, we entered into a new three-year
$2.0 billion unsecured revolving credit facility. At
December 31, 2010, we had approximately $3.1 billion
of unrestricted cash and cash equivalents.
Any new issuance of debt by us or our subsidiaries will be
subject to the consent of the Department of the Treasury if,
after giving effect to the incurrence of the debt and use of
proceeds therefrom, we increase our net indebtedness by more
than $1 billion compared to the same date in the previous
year, or compared to December 8, 2010, if the measurement
is made before December 8, 2011. We cannot predict whether
the Department of the Treasury would consent to us incurring
debt in excess of this amount.
Our bank credit facilities and indentures also limit our ability
to incur secured indebtedness. The most restrictive covenant in
our bank credit facilities permits us and our subsidiaries to
incur secured indebtedness totaling up to 30% of our
consolidated net tangible assets, as defined in the credit
agreement, minus $2.0 billion, which limit currently totals
approximately $10.0 billion. As of March 4, 2011, we
were able to incur an additional $4.8 billion of secured
indebtedness under this covenant. Our debt indentures also
restrict us and our subsidiaries from incurring secured
indebtedness in excess of to 12.5% of our consolidated net
tangible assets, as defined in the indentures. However, we may
obtain secured financing without regard to the 12.5%
consolidated net tangible asset limit under our indentures by
doing so through subsidiaries that qualify as non-restricted
under our debt indentures.
In addition to addressing our liquidity needs through debt
financings, we also pursue potential aircraft sales in
connection with our ongoing fleet strategy. During the year
ended December 31, 2010, we sold 59 aircraft for
approximately $2.0 billion in gross proceeds. Since
December 31, 2010, we have sold an additional four aircraft
for additional proceeds of $127.1 million. In evaluating
potential sales, we balance 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, we would need approval
from the Department of the Treasury if we entered into sales
transactions with aggregate consideration exceeding
$2.5 billion during any twelve-month period. Therefore, we
cannot predict whether any 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,
any 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
22
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 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.
Our
Relationship with AIG
Potential
Change in Ownership
AIG does not have any present intention to sell us. If AIG does
sell more than 49% of our common stock without certain
lenders consent, it would be an event of default under one
of our credit agreements and would allow our lenders to declare
such debt immediately due and payable. Accordingly, any such
sale of us by AIG would require consideration of this credit
agreement. As of the date of this report, we had approximately
$1.7 billion outstanding under such credit agreement. In
addition, an event of default or declaration of acceleration
under such credit agreement could also result in an event of
default under our other debt agreements, including the
indentures governing our public debt.
AIG Loans
from the FRBNY and Department of the Treasury
In September 2008, liquidity issues resulted in AIG seeking and
receiving governmental support through the FRBNY Credit Facility
and TARP funding from the Department of the Treasury, as more
fully described in AIGs Annual Report on
Form 10-K
for the year ended December 31, 2010. On January 14,
2011, AIG was recapitalized (the Recapitalization)
and the FRBNY Credit Facility was repaid and terminated through
a series of transactions, including the Master Transaction
Agreement discussed below, that resulted in the Department of
the Treasury becoming AIGs majority shareholder with
ownership of approximately 92% of AIGs outstanding common
stock. AIG understands that, subject to market conditions, the
Department of the Treasury intends to dispose of its ownership
interest in AIG over time.
Master
Transaction Agreement
The Master Transaction Agreement entered into by AIG and the
Department of the Treasury imposes several restrictions on us.
In particular, we and our subsidiaries are restricted from
taking certain significant actions without obtaining prior
written consent from the Department of the Treasury. These
significant actions include amending or waiving any provisions
of our articles of incorporation, bylaws, or similar
organizational document in a manner that would adversely affect,
in any material respect, the rights of our equity interests;
authorizing or issuing any equity interests, unless to AIG or a
wholly owned subsidiary of AIG; selling or disposing of assets
for total consideration greater than or equal to
$2.5 billion in any twelve-month period; acquiring assets
after December 8, 2010, other than pursuant to existing
purchase commitments at such date, with aggregate scheduled
payments under the purchase contracts for such assets greater
than or equal to $2.5 billion in any twelve-month period;
engaging in any public offering or other sale or transfer of our
equity interests; voluntarily liquidating, filing for
bankruptcy, or taking any other legal action evidencing
insolvency; and increasing our net indebtedness by more than
$1 billion compared to the same date in the previous year,
or compared to December 8, 2010, if the measurement is made
before December 8, 2011.
Additionally, under the Master Transaction Agreement, if AIG has
not repaid certain loans to the Department of Treasury by
May 1, 2013, the Department of the Treasury may direct AIG
to sell certain assets, including shares of ILFC.
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. In the past, these funds were borrowed principally
on an unsecured basis from various sources and included both
public debt and bank facilities. In 2009, we had limited access
to our traditional sources of liquidity and we borrowed
$3.9 billion from AIG Funding to fulfill our liquidity
needs.
During the year ended December 31, 2010, we borrowed
approximately $9.8 billion and $3.3 billion was
provided by operating activities. The $9.8 billion included
the following financings: (i) $326.8 million
borrowed
23
under our 2004 ECA facility, which was used to finance five
Airbus aircraft and to re-finance five Airbus aircraft purchased
in 2009; (ii) new secured financing transactions
aggregating $5.2 billion;
(iii) $2.75 billion aggregate principal amount
of unsecured senior notes issued in private placements; and
(iv) $1.5 billion aggregate principal amount of
unsecured senior notes issued under our shelf registration
statement. As we pay down or refinance our existing lower cost
debt with higher cost financings, our composite interest rate
will increase.
Our debt financing was comprised of the following at the
following dates:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Secured
|
|
|
|
|
|
|
|
|
Senior Secured Notes
|
|
$
|
3,900,000
|
|
|
$
|
|
|
ECA Financings
|
|
|
2,777,285
|
|
|
|
3,004,763
|
|
Bank Debt(a)(b)
|
|
|
1,465,400
|
|
|
|
|
|
Other Secured Financings(c)
|
|
|
1,436,258
|
|
|
|
153,116
|
|
Loans from AIG Funding
|
|
|
|
|
|
|
3,909,567
|
|
Less: Deferred Debt Discount
|
|
|
(22,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,556,634
|
|
|
|
7,067,446
|
|
Unsecured
|
|
|
|
|
|
|
|
|
Bonds and Medium-Term Notes
|
|
|
16,810,843
|
|
|
|
16,566,099
|
|
Bank Debt(a)(b)
|
|
|
234,600
|
|
|
|
5,087,750
|
|
Less: Deferred Debt Discount
|
|
|
(47,977
|
)
|
|
|
(9,556
|
)
|
|
|
|
|
|
|
|
|
|
Total Senior Debt Financings
|
|
|
16,997,466
|
|
|
|
21,644,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,554,100
|
|
|
|
28,711,739
|
|
Subordinated Debt
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,554,100
|
|
|
$
|
29,711,739
|
|
|
|
|
|
|
|
|
|
|
Selected interest rates which include the effect of derivative
instruments:
|
|
|
|
|
|
|
|
|
Composite interest rate(b)
|
|
|
5.66%
|
|
|
|
4.35%
|
|
Percentage of total debt at fixed rate
|
|
|
79.30%
|
|
|
|
58.64%
|
|
Composite interest rate on fixed debt
|
|
|
6.38%
|
|
|
|
5.42%
|
|
Bank prime rate
|
|
|
3.25%
|
|
|
|
3.25%
|
|
|
|
(a)
|
On April 16, 2010, we entered into an amendment to our
credit facility dated October 13, 2006. Upon effectiveness
of this amendment, approximately $2.2 billion of the
$2.5 billion of our previously unsecured bank debt became
secured by the equity interests in certain of our non-restricted
subsidiaries, of which approximately $1.5 billion remained
outstanding at December 31, 2010. Those subsidiaries hold a
pool of aircraft with an appraised value of at least 133% of the
principal amount of the outstanding loans.
|
|
(b)
|
In the fourth quarter of 2010, we repaid in full and terminated
our $2.0 billion revolving credit facility dated
October 14, 2005 and repaid $800 million aggregate
principal amount of loans outstanding under our
$2.5 billion credit facility dated October 13, 2006.
These obligations had interest rates of 0.91% and 3.25%,
respectively, at the time of each prepayment. As a result of the
repayment of these obligations, as well as other scheduled
maturities, our composite interest rate increased from 4.35% at
December 31, 2009, to 5.66% at December 31, 2010.
|
|
(c)
|
Of this amount, $113.7 million (2010) and
$129.6 million (2009) is non-recourse to ILFC. These
secured financings were incurred by VIEs and consolidated into
our financial statements.
|
The above amounts represent the anticipated settlement of our
outstanding debt obligations as of December 31, 2010 and
December 31, 2009. Certain adjustments required to present
currently outstanding hedged debt obligations have been recorded
and presented separately on the 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 U.S. dollars using exchange rates
as of each balance sheet date. The foreign exchange adjustment
for the foreign currency denominated debt hedged with derivative
contracts was $165.4 million and $391.1 million at
December 31, 2010 and 2009, respectively. Composite
interest rates and percentages of total debt at fixed rates
reflect the effect of derivative instruments. The higher
composite interest rate at December 31, 2010, compared to
December 31, 2009, is due to recently issued secured and
unsecured debt with higher interest rates than our older debt
due to our current long-term debt ratings and repayments of debt
with relatively lower interest rates. We expect our composite
interest rate to increase further as we pay down or refinance
our existing lower cost debt.
24
After incurring impairment and fair value adjustment losses on
certain aircraft, as discussed under Results of Operations,
as of September 30, 2010, our fixed charge coverage
ratio was close to the minimum ratio of 1.10x required under our
credit agreement dated October 13, 2006. We entered into an
amendment, effective December 22, 2010, to exclude such
impairment and fair value adjustments from the calculation of
our fixed charge coverage ratio. The fixed charge coverage ratio
was previously defined within such credit agreement as the ratio
of earnings for the period of four fiscal quarters ending on the
last day of the reporting period to combined fixed charges and
preferred stock dividends referred to in paragraph (d)(1) of
Item 503 of
Regulation S-K
under the Securities Act of 1933, and determined pursuant to the
Instructions to such Item 503(d). The amendment allows for
the addition to earnings of impairment charges and fair value
adjustments incurred during the period in connection with
adjustments to fair value of aircraft owned at any time during
the period, to the extent such impairment charges and fair value
adjustments were deducted when arriving at earnings for the
period. As a condition to the effectiveness of the amendment, we
repaid $800 million aggregate principal amount of loans
outstanding under such credit facility.
At December 31, 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, or
financial leverage ratio, a minimum fixed charge coverage ratio
and a minimum consolidated tangible net worth.
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 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 consolidated financial statements. See Note O of
Notes to Consolidated Financial Statements for more
information on VIEs.
The following table presents information regarding the
collateral provided for our secured debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2010
|
|
|
Number of
|
|
|
|
Debt Outstanding
|
|
|
Net Book Value
|
|
|
Aircraft
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Senior Secured Notes
|
|
$
|
3,900,000
|
|
|
$
|
7,400,737
|
|
|
|
174
|
|
ECA Financings
|
|
|
2,777,285
|
|
|
|
5,926,831
|
|
|
|
120
|
|
Bank Debt
|
|
|
1,465,400
|
|
|
|
5,023,767
|
|
|
|
137
|
|
Other Secured Financings
|
|
|
1,436,258
|
|
|
|
2,786,602
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,578,943
|
|
|
$
|
21,137,937
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Notes
On August 20, 2010, we issued $3.9 billion of senior
secured notes, with $1.350 billion maturing in September
2014 and bearing interest of 6.5%, $1.275 billion maturing
in September 2016 and bearing interest of 6.75%, and
$1.275 billion maturing in September 2018 and bearing
interest of 7.125%. The aggregate net proceeds from the
issuances were approximately $3.84 billion after deducting
initial purchaser discounts and commissions, fees and offering
expenses. The notes are secured by a designated pool of
aircraft, initially consisting of 174 aircraft and their related
leases and certain cash collateral. In addition, two of
ILFCs subsidiaries, that either own or hold leases of
aircraft included in the pool securing the notes, have
guaranteed the notes. We can redeem the notes at any time prior
to their maturity, provided we give notification between 30 to
60 days prior to the intended redemption date and subject
to a penalty of the greater of 1% of the outstanding principal
amount and a make-whole premium. There is no sinking
fund for the notes.
The indenture governing the senior secured notes contains
customary covenants that, among other things, restrict our and
our restricted subsidiaries ability to:
(i) create liens; (ii) sell, transfer
or otherwise dispose of assets; (iii) declare or pay
dividends or acquire or retire shares of our capital stock;
(iv) designate restricted subsidiaries as
non-restricted subsidiaries or designate non-restricted
subsidiaries; (v) make investments in or transfer
assets to non-restricted subsidiaries; and
(vi) consolidate, merge, sell or otherwise dispose
of all, or substantially all, of our assets.
25
The indenture also provides for customary events of default,
including but not limited to, the failure to pay scheduled
principal and interest payments on the notes, the failure to
comply with covenants and agreements specified in the indenture,
the acceleration of certain other indebtedness resulting from
non-payment of that indebtedness, and certain events of
insolvency. If any event of default occurs, any amount then
outstanding under the senior secured notes may immediately
become due and payable.
We used proceeds from the issuance of the senior secured bonds
to repay in full our loans from AIG Funding, as discussed above.
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 made under each ECA facility were guaranteed by
various European ECAs. We have collateralized the debt under
each ECA facility 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 December 31, 2010, five loans with an aggregate
principal value of $13.2 million remained outstanding under
the facility and the net book value of the related aircraft was
$1.6 billion. In January 2011, all of the amounts
outstanding under the remaining five loans were repaid in full
and no amounts remain outstanding under the 1999 ECA facility.
In May 2004, we entered into the 2004 ECA facility, which was
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 December 31, 2010, approximately
$2.8 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 0.43% to 4.711%
at December 31, 2010. The net book value of the related
aircraft was $4.3 billion at December 31, 2010.
Our current long-term debt ratings require us to segregate
security deposits, overhaul rentals and rental payments received
for aircraft with loan balances outstanding under the 2004 ECA
facility (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 trustee of the facility. In
addition, we must register the existing individual mortgages on
certain 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 December 31, 2010, we had segregated
security deposits, overhaul rentals and rental payments
aggregating approximately $393.7 million related to
aircraft funded under the 1999 and 2004 ECA facilities,
$12.5 million of which was returned to us subsequent to
December 31, 2010, after we paid in full all amounts
outstanding under the remaining five loans under the 1999 ECA
facility. The segregated amounts will fluctuate with changes in
security deposits, overhaul rentals, rental payments and debt
maturities related to the aircraft funded under the 2004 ECA
facility.
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 no more than 50%, in
order to release liens (including the cross-collateralization
arrangement) on any aircraft financed under the 1999 or 2004 ECA
facilities 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.
26
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
$10.5 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 $301.6 million at December 31, 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 2004 ECA facility, we would have
to segregate lease payments, overhaul rentals and security
deposits received after such acceleration event occurred
relating to all the aircraft funded under the 1999 ECA facility,
including the aircraft no longer subject to a loan.
Secured
Bank Debt
We have a credit facility, dated October 13, 2006, as
amended, under which the original maximum amount available was
$2.5 billion. On April 16, 2010, we entered into an
amendment to this facility with lenders holding
$2.155 billion of the then $2.5 billion of outstanding
loans under the facility (the Electing Lenders). The
Electing Lenders agreed to, among other things:
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revise certain restrictive and financial covenants included in
the credit agreement;
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extend the scheduled maturity date of their loans to October
2012. The extended loans, of which approximately
$1.5 billion remained outstanding at December 31,
2010, bear interest at LIBOR plus a margin of 2.15%, plus
facility fees of 0.2% on the outstanding principal
balance; and
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permit liens securing the loans held by the Electing Lenders.
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We entered into a second amendment, effective December 22,
2010, to this credit agreement that amended the definition of
the fixed charge coverage ratio, a restrictive covenant under
the agreement, to add to earnings any impairment charges and
fair value adjustments incurred during the period, to the extent
such impairment charges and fair value adjustments were deducted
in computing earnings for the period. In conjunction with the
amendment, we repaid $689.6 million of the secured loans
and, as of December 31, 2010, we had secured loans of
$1.465 billion outstanding under the facility, all of which
will mature in October 2012.
We also repaid $110.4 million of the remaining
$345 million of unsecured loans held by lenders who are not
party to the amendment. The remaining $234.6 million
outstanding at December 31, 2010, will mature on their
originally scheduled maturity date in October 2011, with no
increase to the interest rate margin.
The collateralization requirement under the amended facility
provides that the 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
outstanding 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, subject to our right to post cash
collateral for any shortfall. As of December 31, 2010, we
had completed the transfers of all aircraft in an amount
sufficient to meet the Required Collateral Amount. The credit
facility also 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 prohibits us from re-borrowing amounts
repaid under this facility for any reason. Therefore, the
current size of the facility is the $1.7 billion
outstanding under the facility at December 31, 2010. The
credit facility also contains financial and restrictive
covenants that (i) limit our ability to incur
indebtedness, (ii) restrict certain payments, liens
and sales of assets by us, and (iii) require us to
maintain a fixed charge coverage ratio and consolidated tangible
net worth in excess of certain minimum levels.
27
Other
Secured Financings
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 December 31, 2010, the
interest rates on the $82.0 million and $24.0 million
tranches were 3.408% and 5.108%, 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 December 31, 2010, $89.5 million was outstanding
under the two tranches and the net book value of the aircraft
was $137.1 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 December 31, 2010, $46.7 million was
outstanding and the net book value of the aircraft was
$91.2 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 December 31, 2010, $63.3 million of
the proceeds remained restricted. At March 4, 2011,
approximately $17 million of the $63.3 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%.
Loans
from AIG Funding
We borrowed a total of $3.9 billion from AIG Funding from
March 2009 to December 2009. These loans were scheduled to
mature on September 13, 2013. The funds for the loans were
provided to AIG Funding by the Federal Reserve Bank of New York
(FRBNY) pursuant to the FRBNY Credit Facility. 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 Facility up to an
amount equal to the aggregate outstanding balance of the loans
from AIG Funding.
On August 20, 2010, we repaid all amounts outstanding under
the loans from AIG Funding with the net proceeds from the
issuance of $3.9 billion aggregate principal amount of
senior secured notes and $500 million aggregate principal
amount of senior notes. See Senior Secured
Notes and Unsecured Bonds and Medium-Term
Notes. As a result of our repayment of the loans from
AIG Funding, the FRBNY released their liens on the collateral
securing these loans.
Unsecured
Bonds and Medium-Term Notes
Automatic Shelf Registration: We have an
automatic shelf registration statement filed with the SEC. As a
result of our Well-Known Seasoned Issuer, or WKSI, status, we
have an unlimited amount of debt securities registered for sale.
28
Pursuant to our automatic shelf registration: (i) on
August 20, 2010, we issued $500 million of
8.875% notes due 2017 and (ii) on
December 7, 2010, we issued $1.0 billion of
8.25% notes due 2020. At December 31, 2010, we also
had $10.0 billion of public bonds and medium-term notes
outstanding, with interest rates ranging from 0.61% to 7.95%,
which we had issued in prior periods under previous registration
statements.
Euro Medium-Term Note Programme: We have a
$7.0 billion Euro Medium-Term Note Programme under which we
had approximately $1.2 billion and $1.9 billion of
Euro denominated notes outstanding at December 31, 2010 and
2009 (1.0 billion in 2010 and 1.6 billion
in 2009). The notes mature on August 15, 2011, and bear
interest based on Euribor with a spread of 0.375%. The Programme
is perpetual. As a bond issue matures, the principal amount of
that bond becomes available for new issuances under the
Programme. We have eliminated the currency exposure arising from
the notes by hedging the notes into U.S. dollars and fixing
the interest rates at a range of 5.355% to 5.367%. We translate
the debt into U.S. dollars using current exchange rates
prevailing at the balance sheet date. The foreign exchange
adjustment for the foreign currency denominated notes was
$165.4 million and $391.1 million at December 31,
2010 and 2009, respectively.
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 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.
Because the registration statement for the exchange offer had
not been declared effective by the SEC by January 26, 2011,
as required under the registration rights agreement, the annual
interest rate on the affected notes increased by 0.25% per year
for 90 days, commencing on that date. If (i) we
are unable to consummate the exchange offer by April 26,
2011, or (ii) if applicable, a shelf registration
statement has not been declared effective or ceases to be
effective during the required effectiveness period, the annual
interest rate on such notes will increase by an additional 0.25%
per year to the maximum additional rate of 0.50% per year. The
applicable interest rate will revert to the original level after
the exchange offer is consummated.
The indentures governing the unsecured bonds and medium-term
notes contain 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.
The indenture also provides for customary events of default,
including but not limited to, the failure to pay scheduled
principal and interest payments on the notes, the failure to
comply with covenants and agreements specified in the indenture,
the acceleration of certain other indebtedness resulting from
non-payment of that indebtedness, and certain events of
insolvency. If any event of default occurs, any amount then
outstanding under the senior notes may immediately become due
and payable.
Unsecured
Bank Debt
Revolving Credit Facilities: In October 2010,
using cash on hand, we repaid and terminated our
$2.0 billion unsecured revolving credit facility, scheduled
to expire on October 14, 2010. This floating rate
obligation had an interest rate of 0.91% at the time of
repayment.
As of December 31, 2010, $234.6 million of unsecured
loans were outstanding under our credit agreement dated as of
October 13, 2006. These loans are held by lenders not party
to the April 2010 amendment of such facility and remain
unsecured and mature in October 2011 on the original maturity
date for this credit facility. Effective as of December 22,
2010, we amended such credit agreement to revise the definition
of fixed charge coverage ratio to add to earnings impairment
charges and fair value adjustments incurred during such period
to the extent they were
29
deducted from earnings. In conjunction with the amendment, we
repaid $110.4 million of the unsecured loans and, as of
December 31, 2010, $234.6 million of the loans
remained outstanding. See Secured Bank Debt
above.
On January 31, 2011, we entered into a new
$2.0 billion unsecured three-year revolving credit facility
with a group of 11 banks that will expire on January 31,
2014. This revolving credit facility provides for interest rates
based on either a base rate or LIBOR plus an applicable margin
determined by a ratings-based pricing grid. The credit agreement
contains customary events of default and restrictive financial
covenants that require us to maintain a minimum fixed charge
coverage ratio, a minimum consolidated tangible net worth and a
maximum ratio of consolidated debt to consolidated tangible net
worth. As of March 4, 2011, no amounts were outstanding
under this revolving facility.
Term Loans: From time to time, we enter into
funded bank financing arrangements. During 2010, we repaid in
full all such outstanding term loans, and such payments
aggregated $485 million.
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 had a call option date of
December 21, 2010, and the $400 million tranche has a
call option date of December 21, 2015. We did not exercise
the call option at December 21, 2010 and the interest rate
on the $600 million tranche changed from a fixed interest
rate of 5.90% to a floating rate with an initial credit spread
of 1.55% plus the highest of (i) 3 month LIBOR;
(ii)
10-year
constant maturity treasury; and
(iii) 30-year
constant maturity treasury. The interest will reset quarterly.
The $400 million tranche has a fixed interest rate of 6.25%
until the 2015 call option date, and if we do not exercise the
call option, the interest rate will change to a floating rate,
reset quarterly, based on the initial credit spread of 1.80%
plus the highest of (i) 3 month LIBOR;
(ii) 10-year
constant maturity treasury; and
(iii) 30-year
constant maturity treasury. If we choose to redeem the
$600 million tranche, we must pay 100% of the principal
amount of the bonds being redeemed, plus any accrued and unpaid
interest to the redemption date. If we choose to redeem only a
portion of the outstanding bonds, at least $50 million
principal amount of the bonds must remain outstanding.
Commercial
Paper
Commercial Paper: We terminated our
$6.0 billion Commercial Paper Program effective
May 17, 2010. We had access to the FRBNY Commercial Paper
Funding Facility from its inception in 2008 until January 2009.
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 December 31, 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
Other comprehensive income (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.
30
Credit
Ratings
Our current long-term debt ratings impose the following
restrictions under our 2004 ECA facility: (i) we
must segregate all security deposits, overhaul rentals and
rental payments related to the aircraft financed under our 2004
ECA facility into separate accounts controlled by the security
trustee (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 the 1999 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 could adversely affect our ability to
issue unsecured debt and obtain new financings, or renew
existing financings, and it would increase the cost of such
financings.
The following table summarizes our current ratings and outlook
by Fitch Ratings, Inc. (Fitch), Moodys
Investor Service, Inc. (Moodys), and
Standard & Poors, a division of the McGraw-Hill
Companies, Inc. (S&P), the nationally
recognized ratings agencies:
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Rating Agency
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Long-Term Debt
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Corporate Rating
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Outlook
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Date of Last Action
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Fitch
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|
BB
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BB
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Evolving
|
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April 30, 2010
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Moodys
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B1
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B1
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Stable
|
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August 11, 2010
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S&P
|
|
BB+
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BBB−
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Negative
|
|
June 9, 2010
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Secured
Debt Ratings
|
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$750 Million
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$550 Million
|
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$3.9 Billion Senior
|
Rating Agency
|
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Term Loan
|
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Term Loan
|
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Secured Notes
|
|
Fitch
|
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BBB−
|
|
BB
|
|
BBB−
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Moodys
|
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Ba2
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Ba3
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Ba3
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S&P
|
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BBB
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BBB-
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BBB−
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These credit ratings are the current opinions of the rating
agencies. As such, they may be changed, suspended or withdrawn
at any time by the rating agencies as a result of various
circumstances including changes in, or unavailability of,
information.
Existing
Commitments
The following table summarizes our contractual obligations at
December 31, 2010.
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Commitments Due by Year
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Total
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2011
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2012
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2013
|
|
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2014
|
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2015
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Thereafter
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(Dollars in thousands)
|
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Bonds and medium-term notes
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$
|
16,810,843
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$
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4,398,955
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|
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$
|
3,570,607
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|
|
$
|
3,540,881
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|
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$
|
1,040,136
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|
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$
|
1,260,264
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|
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$
|
3,000,000
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Unsecured bank loans
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234,600
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|
|
|
234,600
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|
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Senior secured bonds
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3,900,000
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|
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|
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|
|
|
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|
|
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1,350,000
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|
|
|
|
|
|
|
2,550,000
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Secured bank loans
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1,465,400
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|
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1,465,400
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ECA financings
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2,777,285
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442,138
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|
|
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428,960
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|
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428,960
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423,862
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335,794
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717,571
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Other secured financings
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1,436,258
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|
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13,901
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|
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14,877
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|
|
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15,963
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|
|
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36,716
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|
|
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760,370
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|
|
|
594,431
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Subordinated debt
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1,000,000
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
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Interest payments on debt outstanding(a)(b)
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9,141,617
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|
|
|
1,459,570
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|
|
|
1,262,521
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|
|
|
1,050,685
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|
|
|
856,440
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|
|
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679,989
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|
|
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3,832,412
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Operating leases(c)(d)
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59,802
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|
|
|
11,973
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|
|
|
12,453
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|
|
|
12,951
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|
|
|
13,362
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|
|
|
9,063
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|
|
|
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Pension obligations(e)
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|
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9,770
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|
|
|
1,539
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|
|
|
1,577
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|
|
|
1,639
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|
|
|
1,676
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|
|
|
1,676
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|
|
|
1,663
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Purchase commitments(f)
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13,532,700
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|
|
|
281,700
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|
|
|
639,400
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|
|
|
1,103,000
|
|
|
|
2,086,100
|
|
|
|
1,436,800
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|
|
|
7,985,700
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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50,368,275
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|
|
$
|
6,844,376
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|
|
$
|
7,395,795
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|
|
$
|
6,154,079
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|
|
$
|
5,808,292
|
|
|
$
|
4,483,956
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|
|
$
|
19,681,777
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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31
Contingent
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Contingency Expiration by Year
|
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Total
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
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(Dollars in thousands)
|
|
Asset Value Guarantees(g)
|
|
$
|
552,439
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|
|
$
|
27,841
|
|
|
$
|
78,950
|
|
|
$
|
96,003
|
|
|
$
|
37,031
|
|
|
$
|
157,132
|
|
|
$
|
155,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(h)
|
|
$
|
552,439
|
|
|
$
|
27,841
|
|
|
$
|
78,950
|
|
|
$
|
96,003
|
|
|
$
|
37,031
|
|
|
$
|
157,132
|
|
|
$
|
155,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Future interest payments on
floating rate debt are estimated using floating interest rates
in effect at December 31, 2010.
|
(b)
|
|
Includes the effect of interest
rate and foreign currency derivative instruments.
|
(c)
|
|
Excludes fully defeased aircraft
sale-lease back transactions.
|
(d)
|
|
Minimum rentals have not been
reduced by minimum sublease rentals of $6.5 million
receivable in the future under non-cancellable subleases.
|
(e)
|
|
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
2011 consists of total estimated allocations for
2011 and Thereafter has not been estimated. The
amount allocated has not been material to date.
|
|
|
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(f)
|
|
In the first quarter of 2011, we
signed agreements to purchase 75 A320neos and 25 A321neos from
Airbus, which will replace our previous A380 deliveries, and 33
737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019.
|
|
|
|
(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 $225.4 million of uncertain tax liabilities
and any effect of net tax liabilities. See Note K of
Notes to Consolidated Financial Statements. The future
cash flows to these liabilities are uncertain and we are unable
to make reasonable estimates of the outflows.
|
Variable
Interest Entities
Our leasing and financing activities require us to use many
forms of special purpose entities to achieve our business
objectives and we have participated to varying degrees in the
design and formation of these special purpose entities. A
majority of these entities are wholly-owned; we are the primary
or only variable interest holder, we are the only decision maker
and we guarantee all the activities of the entities. However,
these entities meet the definition of a VIE because they do not
have sufficient equity to operate without our subordinated
financial support in the form of intercompany notes and loans
which serve as equity. We have variable interest in other
entities in which we have determined that we are the primary
beneficiary, because by design we absorb the majority of the
risks and rewards. Further, since we control and manage all
aspects of the entities, the related aircraft are included in
Flight equipment under operating leases and the related
borrowings are included in Debt Financings on our Consolidated
Balance Sheets.
In addition to the above entities ILFC has 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
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 these
entities separately on our 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 2009 Consolidated Balance
Sheet and net expenses of $7.2 million, and
$2.3 million are included in our Consolidated Statements of
Operations for the years ended December 31, 2009, and 2008,
respectively, for these entities. We have a credit facility with
these entities to provide financing up to approximately
$13.5 million, of which approximately $6.3 million was
borrowed at December 31, 2010. The maximum exposure to loss
for these entities is $23.0 million, which is the total
investments in senior secured notes and total outstanding under
the credit facility.
Results
of Operations
Certain amounts have been reclassified in the 2009 and 2008
Consolidated Statements of Operations and Statements of Cash
Flows to conform to our 2010 presentation. During the annual and
quarterly periods ended December 31, 2010, we changed
(i) the presentation of the Provision for overhauls
from operating expenses to a reduction of Rental of flight
equipment revenues and (ii) the presentation of the
impairment charges, fair value adjustments and lease related
charges recorded in Flight equipment marketing revenues to
operating expenses. The details of these classification errors
are provided in Note A of Notes to Consolidated
Financial Statements for the 2009 and 2008 prior annual
periods and in Note V of Notes to Consolidated Financial
Statements for the quarterly prior periods.
32
2010
Compared to 2009
Revenues from net rentals of flight equipment decreased 4.1% to
$4,726.5 million for the year ended December 31, 2010,
from $4,928.3 million for the year ended December 31,
2009. The number of aircraft in our fleet decreased to 933 at
December 31, 2010, compared to 993 at December 31,
2009. Revenues from net rentals of flight equipment decreased
(i) $206.8 million due to a decrease related to
aircraft in service during the year ended December 31,
2009, and either transferred to Flight equipment held for sale
or sold prior to December 31, 2010;
(ii) $25.6 million due to a decrease in
overhaul rentals recognized as a result of an increase in actual
and expected overhaul related expenses partly offset by an
increase in the number of leases with overhaul provisions;
(iii) $63.9 million due to a decrease in lease
rates on aircraft in our fleet during both periods, that were
re-leased or had lease rate changes between the two periods; and
(iv) $13.1 million due to lost revenue relating
to aircraft in transition between lessees, primarily resulting
from repossessions of aircraft from airlines. These revenue
decreases were partially offset by a $107.6 million
increase due to the addition of new aircraft to our fleet after
December 31, 2009, and aircraft in our fleet as of
December 31, 2009 that earned revenue for a greater number
of days during the year ended December 31, 2010 than during
the year ended December 31, 2009. All aircraft in our fleet
were subject to signed lease agreements or signed letters of
intent at December 31, 2010.
In addition to 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 on a principal and
commission basis. As part of our ongoing fleet strategy we sold
or agreed to sell 77 aircraft during the year ended
December 31, 2010, two of which were accounted for as
sales-type leases. For these aircraft, we recorded any
impairments or adjustments to fair value in Impairment charges
and fair value adjustments on flight equipment to be disposed of
(see below for variance analysis of Impairment charges and fair
value adjustments on flight equipment sold or to be disposed
of). In comparison, we sold nine aircraft during the same period
in 2009, three of which were accounted for as a sales-type
lease. Three of these nine transactions resulted in gains, and
are recorded in Flight equipment marketing and gain on aircraft
sales on our Consolidated Statement of Operations. The
impairment charges recorded on the remaining six aircraft are
recorded in Impairment charges and fair value adjustments on
flight equipment sold or to be disposed of.
Interest and other revenue increased to $61.7 million for
the year ended December 31, 2010, compared to
$58.2 million for the year ended December 31, 2009,
due to (i) a $7.6 million increase in interest
income related to our Notes receivable and Net investment in
finance and sales-type leases; (ii) a
$5.0 million increase in proceeds received related to total
loss of aircraft; (iii) a $1.9 million increase
in security deposits forfeitures related to nonperformance by
customers; and (vi) other minor increases
aggregating $4.1 million. The increases were partially
offset by (i) a $7.8 million decrease in
foreign exchange gains; and (ii) a $7.3 million
decrease in revenues from VIEs, which we consolidated into our
2009 statement of operations and deconsolidated on
January 1, 2010.
Interest expense increased to $1,567.4 million for the year
ended December 31, 2010, compared to $1,365.5 million
for the year ended December 31, 2009, as a result of a
0.58% increase in our average composite interest rate, partially
offset by a decrease in average outstanding debt (excluding the
effect of debt discount and foreign exchange adjustments) to
$28.7 billion for the year ended December 31, 2010,
compared to $31.1 billion for the year ended
December 31, 2009.
33
Our composite borrowing rates fluctuated as follows from
December 2007 to December 2010:
ILFC
Composite Interest Rates and Prime Rates
The effect from derivatives, net of change in hedged items due
to changes in foreign exchange rates was a loss of
$47.8 million and income of $21.5 million for the
years ended December 31, 2010 and 2009, primarily due to
ineffectiveness recorded on our derivative instruments
designated as cash flow hedges. The income effect for the year
ended December 31, 2010, also includes $15.4 million
of losses on matured derivative contracts compared to gains on
matured swaps of $9.7 million for the year ended
December 31, 2009. If hedge accounting treatment is not
applied during the entire life of the derivative, or the hedge
is not perfectly effective for some part of its life, a gain or
loss will be realized at the maturity of the swap. See
Note Q of Notes to Consolidated Financial Statements.
Depreciation of flight equipment decreased to
$1,954.9 million for the year ended December 31, 2010,
compared to $1,959.4 million for the year ended
December 31, 2009, due to a decrease in the cost of our
fleet to $51.6 billion at December 31, 2010 from
$57.7 billion at December 31, 2009. The cost of our
fleet held for use was reduced by impairment charges recorded
during the year and triggered by aircraft being transferred to
Flight equipment held for sale, aircraft being sold or deemed
likely to be sold, and impairment charges resulting from our
recurring recoverability analyses. See below for variance
analysis of impairment charges taken.
We recorded Impairment charges and fair value adjustments on
flight equipment sold or to be disposed of in the amount of
$550.0 million for the year ended December 31, 2010,
compared to charges of $34.7 million for the year ended
December 31, 2009. During the year ended December 31,
2010, we recorded impairment charges and fair value adjustments
aggregating $394.9 million related to aircraft that were
either reclassified to Flight equipment held for sale or
designated for part-out. In addition, we recorded
$155.1 million in Impairment charges and fair value
adjustments relating to aircraft that were deemed likely to be
sold, or sold. The charges for the year ended December 31,
2009 related to impairment charges and fair value adjustments on
seven aircraft.
Aircraft impairment charges on flight equipment held for use
increased to $948.7 million for the year ended
December 31, 2010, from $52.9 million for the year
ended December 31, 2009. As a result of the December 2010
announcement by Airbus to offer the new narrow body neo aircraft
with new fuel efficient engine options, we recorded impairment
charges aggregating $557.4 million related to 61 aircraft
in our fleet. In addition to these charges, we recorded an
additional $391.3 million impairment charges on 17 aircraft
in our fleet as a result of our recurring recoverability
analyses performed during the year. During the year ended
December 31, 2009, we recorded impairment charges of
$34.7 million related to seven aircraft that were
subsequently sold. We also recorded impairment charges
aggregating $52.9 million during the year ended
December 31, 2009, relating to our fleet held for use. We
recorded no impairment charges during the year ended
December 31, 2008. See Note D of Notes to
Consolidated Financial Statements.
34
Selling, general and administrative expenses increased to
$212.8 million for the year ended December 31, 2010,
compared to $196.7 million for the year ended
December 31, 2009, due to (i)
$20.7 million higher pension expenses including out of
period adjustments aggregating $20.2 million related to
pension expenses covering employee services from 1996 to 2010
and not previously recorded; (ii) a
$19.5 million increase in write-offs of notes receivable;
and (iii) a $3.5 million increase in impairment
charges related to spare parts inventory. These increases were
partially offset by (i) a $14.5 million
decrease in expenses from VIEs, which we consolidated into our
2009 statement of operations and deconsolidated January 1,
2010 as a result of our adoption of new guidance;
(ii) a $10.6 million decrease in aircraft
operating expenses stemming from a reduction in expenses
realized related to repossessions of aircraft; and
(iii) other minor fluctuations aggregating a
decrease of $2.5 million.
Other expenses for the year ended December 31, 2010 of
$91.2 million stem from lease related costs that were
expensed as a result of agreements to sell aircraft to third
parties that are currently under lease. There were no such
comparable expenses for the year ended December 31, 2009.
Our effective tax rate for the year ended December 31, 2010
is a tax benefit of 35.2%, as compared with a tax expense of
35.9% for the year ended December 31, 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 $59.5 million primarily 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.
Accumulated other comprehensive loss was $58.9 million and
$138.2 million at December 31, 2010 and 2009,
respectively. Fluctuations in Accumulated other comprehensive
income are primarily due to changes in market values of cashflow
hedges. See Note I of Notes to the Consolidated
Financial Statements.
2009
Compared to 2008
Revenues from net rentals of flight equipment increased 5.3% to
$4,928.3 million for the year ended December 31, 2009,
from $4,678.9 million for the year ended December 31,
2008. The number of aircraft in our fleet increased to 993 at
December 31, 2009, compared to 955 at December 31,
2008. Revenues from net rentals of flight equipment increased
(i) $323.9 million due to the addition of new
aircraft to our fleet after December 31, 2008, and aircraft
in our fleet as of December 31, 2008, that earned revenue
for a greater number of days during the year ended
December 31, 2009, than during the year ended
December 31, 2008; (ii) $2.9 million due
to a straight-line adjustment taken in 2008, which decreased the
2008 lease revenue; and (iii) $7.0 million due
to lower charges taken related to the early termination of six
lease agreements in 2009 compared to ten lease agreements in
2008. These revenue increases were partially offset by
(i) a $6.1 million decrease in overhaul rentals
recognized due to an increase in actual and expected overhaul
related expenses partly offset by an increase in the number of
leases with overhaul provisions for the year ended
December 31, 2009; (ii) a $37.7 million
decrease due to lower lease rates on aircraft in our fleet
during both periods, that were re-leased or had lease rate
changes between the two periods; (iii) a
$25.8 million decrease in lost revenue relating to aircraft
in transition between lessees, primarily resulting from
repossessions of aircraft from airlines who filed for bankruptcy
protection or ceased operations; and (iv) a
$14.8 million decrease related to aircraft in service
during the year ended December 31, 2008, and sold prior to
December 31, 2009. Eight aircraft in our fleet were not
subject to a signed lease agreement or a signed letter of intent
at December 31, 2009, seven of which were subsequently
leased.
In addition to 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 on a principal and
commission basis. We recorded revenue of $15.5 million from
flight equipment marketing and gain on aircraft sales for the
year ended December 31, 2009, compared to
$46.8 million for the year ended December 31, 2008.
Interest and other revenue decreased to $58.2 million for
the year ended December 31, 2009, compared to
$98.3 million for the year ended December 31, 2008,
due to (i) a $20.3 million decrease in interest
income which was directly related to customers paying down
principal balances of Notes receivable and Net investment in
finance and sales-type leases during 2009 and a decrease in
interest rates; (ii) a $15.1 million decrease
in security deposits forfeitures related to nonperformance by
customers; (iii) an $8.1 million decrease in
settlement and sales of claims against bankrupt airlines;
(iv) a $7.3 million decrease in revenues
related to our consolidated noncontrolled VIEs;
35
and (v) other minor decreases aggregating
$3.9 million. The decreases were offset by
(i) a $9.2 million increase in foreign exchange
gains; and (ii) a $5.4 million increase in
proceeds received in excess of book value related to a loss of
an aircraft.
Interest expense decreased to $1,365.5 million in 2009
compared to $1,576.7 million in 2008 as a result of lower
short-term interest rates and a decrease in average outstanding
debt to $31.1 billion in 2009 compared to
$31.5 billion in 2008. Our average composite interest rate
decreased to 4.43% at December 31, 2009, from 4.83% at
December 31, 2008.
The effect from derivatives, net of change in hedged items due
to changes in foreign exchange rates was income of
$21.5 million and expenses of $39.9 million for the
years ended December 31, 2009 and 2008, respectively. The
income effect for the year ended December 31, 2009,
includes $9.7 million of gains on matured swaps compared to
losses on matured swaps of $22.1 million for the year ended
December 31, 2008. If hedge accounting treatment is not
applied during the entire life of the derivative, or the hedge
is not perfectly effective for some part of its life, a gain or
loss will be realized at the maturity of the swap. See
Note Q of Notes to Consolidated Financial Statements.
Depreciation of flight equipment increased 5.1% to
$1,959.4 million for the year ended December 31, 2009,
compared to $1,864.7 million for the year ended
December 31, 2008 due to the addition of new aircraft to
our leased fleet, which increased the total cost of the fleet to
$57.7 billion at December 31, 2009 from
$55.4 billion at December 31, 2008.
Selling, general and administrative expenses increased to
$196.7 million for the year ended December 31, 2009,
compared to $183.4 million for the year ended
December 31, 2008, due to (i) a
$10.2 million increase in salary and employee related
expenses, including accrued and unpaid performance incentive and
retention bonuses; (ii) a $9.4 million increase
in operating expenses to support our growing fleet; and
(iii) other minor increases aggregating
$0.6 million. The increases were offset by
(i) a $4.5 million decrease in write downs of
notes receivable and (ii) a $2.4 million
decrease in expenses related to our consolidated noncontrolled
VIEs.
Other expenses for the year ended December 31, 2008,
consisted of (i) a charge of $18.1 million
related to a write down of a secured note to fair value (see
Note E of Notes to the Consolidated Financial
Statements) and (ii) a charge of
$28.5 million related to a notes receivable secured by
aircraft which became uncollectible when Alitalia filed for
bankruptcy protection and rejected the leases of the aircraft
securing the note. The charge reflects the difference between
the fair market value of the aircraft received and the net
carrying value of the note.
Our effective tax rate for the years ended December 31,
2009 and 2008 remained relatively constant. 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 $44.3 million primarily 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.
In 2002 and 2003 we participated in certain tax planning
activities with our parent, AIG and related entities, which
provided certain tax and other benefits to the AIG consolidated
group. As a result of our participation, ILFCs liability
to pay tax under our tax sharing agreement increased. AIG agreed
to defer $245.0 million of this liability until 2007
($160.0 million) and 2010 ($85.0 million). The
liability is recorded in Tax benefit sharing payable to AIG on
our Consolidated Balance Sheets.
Accumulated other comprehensive loss was $138.2 million and
$168.1 million at December 31, 2009 and 2008,
respectively. Fluctuations in Accumulated other comprehensive
income are primarily due to changes in market values of cashflow
hedges. See Note I of Notes to the Consolidated
Financial Statements.
Critical
Accounting Policies and Estimates
Our Managements discussion and analysis of financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with GAAP. 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 disclosures of contingent
assets and liabilities. On a recurring basis, we evaluate our
estimates, including those related to revenue, including
overhaul rentals, flight equipment, derivatives, fair value
measurements, and income tax contingencies. We base our
estimates on historical experience
36
and on various other assumptions that are believed to be
reasonable under the circumstances. These estimates 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. A summary of our
significant accounting policies is presented in Note B to
our Consolidated Financial Statements. We believe the following
critical accounting policies could have a significant impact on
our results of operations, financial position and financial
statement disclosures, and may require subjective and complex
estimates and judgments.
Overhaul Rentals: Under the provisions of all of our
leases, lessees are responsible for maintenance and repairs,
including major maintenance (overhauls) over the term of the
lease. Under the provisions of many of our leases, we receive
overhaul rentals based on the usage of the aircraft. For certain
airframe and engine overhauls, we reimburse the lessee for costs
incurred up to, but not exceeding the overhaul rentals that the
lessee has paid to us. We recognize overhaul rentals received as
revenue, net of estimated overhaul reimbursements. We estimate
expected overhaul reimbursements during the life of the lease,
which estimate requires significant judgments. Management
determines the estimated future overhaul reimbursement rate
based on quantitative and qualitative information including:
(i) changes in historical overhaul pay-out rates
from period to period; (ii) trends in overhaul
reimbursements identified during our quarterly aircraft cost
review; (iii) trends in the historical overhaul
pay-out percentages for expired leases; (iv) future
trends in the industry, including the overhaul model;
(v) future estimates of overhaul pay-out rates on leases
scheduled to expire; (vi) changes in our business
model or aircraft portfolio strategies; and
(vii) other factors identified from time to time
that effect the future overhaul pay-out percentages. The
historical overhaul pay-out rate is subject to significant
fluctuations. Using its judgment, management periodically
evaluates its overhaul reimbursement rate, and adjusts overhaul
rental revenue recognized accordingly. Additionally, as our
average fleet age increases, we anticipate that estimated future
overhaul reimbursements will increase. If the actual overhaul
reimbursements are different than our estimates, there could be
a material impact on our results of operations.
Flight Equipment: Flight equipment under operating lease
is our largest asset class, representing the majority of our
consolidated assets for the years ended December 31, 2010
and 2009, respectively. There are several accounting policies
that are applicable to our flight equipment that may require
subjective and complex estimates and judgments that affect the
reported amounts of our flight equipment and the related
disclosures, as described below.
Recoverability Assessments: Management evaluates flight
equipment under operating leases for recoverability on a
recurring basis. These recoverability assessments are performed
for aircraft that are held for use and aircraft that are deemed
more likely than not to be sold. The determination of whether a
recoverability assessment must be performed and the performance
of the recoverability assessment requires significant judgments
and estimates.
A recoverability assessment is performed by comparing the
estimated future cash flows expected to be generated by the
aircraft on an undiscounted basis to the carrying value of the
aircraft and is assessed at the lowest level of identifiable
cash flows, which for us is usually at the individual aircraft
level. If the estimated aggregate future undiscounted cash flows
exceed the carrying value of the aircraft, the carrying value of
the aircraft is considered recoverable and no impairment is
recorded. If the carrying value of the aircraft exceeds the
estimated aggregate future undiscounted cash flows, the aircraft
is deemed not recoverable, then management is required to
determine the aircrafts fair value and record an
impairment charge equal to the difference between the carrying
value of the aircraft and its fair value. When determining
recoverability of aircraft in accordance with GAAP, management
does not consider materiality. We only record an impairment loss
if and when the carrying value of the aircraft exceeds the
aircrafts estimated aggregate future undiscounted cash
flows.
Recurring Recoverability Assessment: Management evaluates
quarterly the need to perform a recoverability assessment of
held for use aircraft considering the requirements under GAAP
and performs this assessment at least annually for all aircraft
in our fleet. Recurring recoverability assessments are performed
whenever events or changes in circumstances indicate that the
carrying amount of our aircraft may not be recoverable, which
may require us to change our assumptions related to future
estimated cash flows. These events or changes in circumstances
considered include potential sales, changes in contracted lease
terms, changes in the status of a lease, re-lease, not subject
to lease, changes in portfolio strategies, changes in demand for
a particular aircraft type
37
and changes in economic and market circumstances. Economic and
market circumstances include the risk factors affecting the
airline industry, as disclosed in Item 1A Risk
Factors Overall Airline Industry Risk.
The undiscounted cash flows in the recoverability assessment
consist of cash flows from currently contracted leases, future
projected lease cash flows, including contingent rentals and an
estimated disposition value, as appropriate, for each aircraft.
Management is very active in the aircraft leasing industry and
develops the assumptions used in the recoverability assessment
based on its knowledge of active lease contracts, current and
future expectations of the global demand for a particular
aircraft type and historical experience in the aircraft leasing
market and aviation industry, as well as information received
from third party industry sources. The assumptions of
undiscounted cash flows developed are estimates and may change
due to: (i) changes in contracted lease rates due to
restructuring of lease payments and terms of leases and changes
in lease term due to early termination and extension of leases;
(ii) changes in future lease rates and residual
values due to demand for a particular aircraft type caused by
risk factors affecting the airline industry;
(iii) changes in lease rates and disposition values
caused by the global economic environment;
(iv) changes in the anticipated time period that an
aircraft can be economically leased; (v) changes in the
timing of disposal or planned disposal of aircraft in the fleet;
and (vi) changes in how the aircraft will be deployed in
our business. In the event that an aircraft does not meet the
recoverability assessment, the aircraft will be recorded at fair
value in accordance with our Fair Value Policy resulting in an
impairment charge. Our Fair Value Policy is described below
under Fair Value Measurements.
In our recoverability assessment we identify aircraft in our
fleet that are most susceptible to impairment, which are those
aircraft that management considers to have estimated future
undiscounted cash flows that are sufficiently close to their
carrying values, but not less than their carrying values, that
warrant further evaluation. These aircraft are typically older
less in demand aircraft that generally have lower lease rates
and are therefore more sensitive to changes in the estimates of
future undiscounted cash flows. As of December 31, 2010, we
identified 63 aircraft that were most susceptible to failing the
recoverability assessment. Of the 63 aircraft identified, two
aircraft did not pass the full undiscounted recoverability
assessment and a corresponding impairment was recognized for the
year ended December 31, 2010. The remaining 61 aircraft
passed the recoverability assessment with aggregate undiscounted
cash flows exceeding the carrying value of aircraft between 0.2%
and 197%, which represents a 22% excess above the net carrying
value of those aircraft. These 61 aircraft had an aggregate net
book value of approximately $3.4 billion at
December 31, 2010. As of December 31, 2010 Management
believes that the carrying values of these aircraft as well as
all other aircraft in its fleet are supported by the estimated
future aggregate undiscounted cash flows expected to be
generated by each aircraft. Management believes a full recovery
of the airline industry may not be imminent and lower future
lease rates and increased costs associated with repossessing and
redeploying aircraft may continue to have a negative impact on
our operating results in 2011, including causing future
potential aircraft impairment charges.
We recorded aggregate impairment charges of approximately
$948.7 million related to 78 aircraft in our fleet held for
use in connection with our recoverability assessments for the
year ended December 31, 2010.
See Item 7 Overview for details of the
2010 impairment charges.
Recoverability Assessments Potential Sales:
Management evaluates quarterly the need to perform
recoverability assessments of all contemplated aircraft sale
transactions considering the requirements under GAAP. The
recoverability assessment is performed if events or changes in
circumstances indicate that it is more likely than not that an
aircraft will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life. Due to
the significant uncertainties of potential sales transactions
Management must use its judgment to evaluate whether a sale is
more likely than not. The factors that Management considers in
its assessment include (i) the progress of the
potential sales transactions through a review and evaluation of
the sales related documents and other communications, including,
but not limited to, letters of intent or sales agreements that
have been negotiated or executed, (ii) the general
or specific ILFC fleet strategies, liquidity requirements and
other business needs and how those requirements bear on the
likelihood of sale, and (iii) the evaluation of
potential execution risks, including the source of potential
purchaser funding and other execution risks.
The undiscounted cash flows in the more likely than not sales
recoverability assessment will depend on the structure of the
potential sale transaction and may consist of cash flows from
currently contracted leases, including contingent rentals, and
the estimated proceeds from sale. In the event that an aircraft
does not meet the more likely than not sales recoverability
assessment, the aircraft will be recorded at fair value, which
in almost all of our
38
potential sales transactions is based on the value of the sales
transaction, resulting in an impairment charge. We record the
impairment charge and other costs of sales in Selling, general
and administrative, or if material, present it separately on our
Consolidated Statement of Operations.
Flight Equipment Held for Sale: We classify aircraft as
Flight equipment held for sale when all the criteria under GAAP
are met. Aircraft classified as Flight equipment held for sale
are recorded at the lower of their carrying amount or estimated
fair value less estimated costs to sell. If the carrying value
of the aircraft exceeds its estimated fair value, then a fair
value adjustment is recognized in Selling, general and
administrative, or if material, presented separately on our
Consolidated Statements of Operations. We cease recognizing
depreciation at the time the aircraft is transferred to Flight
equipment held for sale.
Management evaluates all contemplated aircraft sale transactions
to determine whether all the required criteria have been met
under GAAP to classify aircraft as Flight equipment held for
sale. Management uses judgment in evaluating these criteria. Due
to the significant uncertainties of potential sale transaction,
the held for sale criteria generally will not be met 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.
We recorded aggregate impairment charges and fair value
adjustments related to 77 aircraft sold or to be disposed of
approximately $550.0 million, which includes aircraft that
we deemed as either more likely than not to be sold or
classified as held for sale for the year ended December 31,
2010. See Item 7 Overview for details of
these 2010 impairment charges.
Depreciable Lives and Residual Values: We generally
depreciate passenger aircraft, including those acquired under
capital leases, using the straight-line method over a
25-year life
from the date of manufacture to a 15% residual value. For
freighter aircraft, depreciation is computed using the
straight-line method to a zero residual value over its useful
life of 35 years. We review the residual values of our
aircraft periodically to determine if those values are
appropriate, including aircraft that have been impaired and
aircraft that are out of production. When a residual value
changes we adjust our depreciation rates on a prospective basis.
Any change in the assumption of useful life or residual values
could have a significant impact on our results of operations.
Derivative
Financial Instruments
We employ a variety of derivative instruments to manage our
exposure to interest rate and foreign currency risks.
Derivatives are recognized on our Consolidated Balance Sheets at
their fair values. We obtain our derivative fair values on a
quarterly basis from AIG. When hedge accounting treatment is
achieved for a derivative, the changes in fair value related to
the effective portion of the hedge is recognized in other
comprehensive income or in current period earnings, depending on
the designation of the derivative as a cash flow hedge or a fair
value hedge. The ineffective portion of the hedge is recognized
in income. At the time the derivative is designated as a hedge,
we select a method of effectiveness assessment, which we must
use for the life of the hedge. We use the hypothetical
derivative method for all of our hedges when we assess
effectiveness. This method involves establishing a hypothetical
derivative that mirrors the hedged item, but has a zero-value at
the hedge designation date. The cumulative change in fair value
of the actual hedge derivative instrument is compared to the
cumulative change in the fair value of the hypothetical
derivative. The difference between these two amounts is the
calculated ineffectiveness and is recorded in current period
earnings.
Fair
Value Measurements
Fair value is defined as the amount 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.
We measure the fair values of our derivatives on a recurring
basis. Our derivatives are not traded on an exchange and are
therefore inherently more difficult to value. AIG provides us
with the recurring fair value of our derivative instruments. AIG
has established and documented a process for determining fair
values. AIGs valuation model includes a variety of
observable inputs, including contractual terms, interest rate
curves, foreign exchange rates, yield curves, credit curves,
measures of volatility, and correlations of such inputs.
Valuation adjustments may be made in the determination of
39
fair value. These adjustments include amounts to reflect
counterparty credit quality and liquidity risk, and are as
follows:
|
|
|
|
|
Credit Valuation Adjustment
(CVA): The CVA adjusts the valuation
of derivatives to account for nonperformance risk of our
counterparty with respect to all net derivative assets
positions. The CVA also accounts for our own credit risk, in the
fair value measurement of all net derivative liabilities
positions, when appropriate.
|
|
|
|
Market Valuation Adjustment
(MVA): The MVA adjusts the valuation
of derivatives to reflect the fact that we are an
end-user of derivative products. As such the
valuation is adjusted to take into account the bid-offer spread
(the liquidity risk).
|
We measure the fair value of aircraft on a non-recurring basis,
when GAAP requires the application of fair value, including
events or changes in circumstances that indicate that the
carrying amounts of our aircraft may not be recoverable. We
principally use the income approach to measure the fair value of
our aircraft. The income approach is based on the present value
of cash flows from contractual lease agreements and projected
future lease payments, including contingent rentals where
appropriate, which extend to the end of the aircrafts
economic life in its highest and best use configuration, as well
as a disposition value based on expectations of market
participants. The cash flows used in the fair value estimate are
consistent with those used in the recurring recoverability
assessment and subject to the same judgments. See Recurring
Recoverability Assessments above for further discussion.
Lease
Revenue
We lease flight equipment principally under operating leases and
recognize rental revenue ratably over the life of the lease. The
difference between the rental revenue recognized and the cash
received under the provisions of our leases is included in Lease
receivables and other assets on our Consolidated Balance Sheets.
Past-due rental revenue is recognized on the basis of
managements assessment of collectability. Management
monitors all lessees that are behind in lease payments and
discusses relevant operational and financial issues faced by our
lessees with our marketing executives to determine the amount of
rental revenue to recognize for past due amounts. Our customers
make lease payments in advance and we generally recognize rental
revenue only to the extent we have received payments or hold
security deposits.
Income
Taxes
We are included in the consolidated federal income tax return of
AIG. Our provision for federal income taxes is calculated on a
separate return basis, adjusted to give recognition to the
effects of net operating losses, foreign tax credits and the
benefit of the Foreign Sales Corporation and Extraterritorial
Income Exclusion provisions of the Internal Revenue Code to the
extent we estimate that they will be realizable in AIGs
consolidated return. To the extent the benefit of a net
operating loss is not utilized in AIGs tax return, AIG
will reimburse us upon the expiration of the loss carry forward
period as long as we are still included in AIGs
consolidated federal tax return and the benefit would have been
utilized if we had filed a separate consolidated federal income
tax return. We calculate our provision using the asset and
liability approach. This method gives consideration to the
future tax consequences of temporary differences between the
financial reporting basis and the tax basis of assets and
liabilities based on currently enacted tax rates. Deferred tax
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
We have uncertain tax positions consisting primarily of benefits
from our FSC and ETI. We recognize uncertain tax benefits only
to the extent that it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position.
40
New
Accounting Pronouncements
Recent
Accounting Pronouncements:
We adopted the following accounting standards during 2010:
Accounting for Transfers of Financial
Assets: In June 2009, the FASB issued an
accounting standard addressing transfers of financial assets
that, among other things, removes the concept of a qualifying
special purpose entity (QSPE) from the FASB ASC and
removes the exception from applying the consolidation rules to
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.
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.
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.
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
financing receivables and the allowance for credit losses.
For further discussion of these recent accounting standards,
accounting standards adopted in prior years, and their
application to us, see Note B of Notes to Consolidated
Financial Statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Measuring potential losses in fair values has recently become
the focus of risk management efforts by many companies. Such
measurements are performed through the application of various
statistical techniques. One such technique is Value at Risk
(VaR), a summary statistical measure that uses
historical interest rates and foreign currency exchange rates
and equity prices and 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.
We believe that statistical models alone do not provide a
reliable 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
employ a variety of derivative instruments to manage our
exposure to interest rate and foreign currency risks. We
statistically measure the loss of fair value through the
application of a VaR model on a quarterly basis. In this
analysis the net fair value of our operations is determined
using the financial instrument assets and other assets and
liabilities. This 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 December 31, 2010 and 2009. For each scenario,
each financial instrument is re-priced. Scenario values for our
operations 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 market
value incurred by these scenarios 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 following table presents the average, high and
low VaRs on a combined basis and of each component at market
risk for our operations with respect to its fair value for the
periods ended December 31, 2010 and 2009. The VaR
increased, primarily due to an increase in the
41
average duration of our outstanding debt and a decrease in the
value of Flight equipment under operating leases due to sales
and impairment charges and fair value adjustments.
ILFC
Market Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
December 31, 2009
|
|
|
Average
|
|
High
|
|
Low
|
|
Average
|
|
High
|
|
Low
|
|
|
(Dollars in millions)
|
|
Combined
|
|
$
|
88.9
|
|
|
$
|
158.6
|
|
|
$
|
20.0
|
|
|
$
|
46.5
|
|
|
$
|
80.0
|
|
|
$
|
35.9
|
|
Interest Rate
|
|
|
88.9
|
|
|
|
158.5
|
|
|
|
20.0
|
|
|
|
46.6
|
|
|
|
80.0
|
|
|
|
36.2
|
|
Currency
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The response to this Item is submitted as a separate section of
this report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
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. Such information is accumulated and communicated to
our management, including the Chief Executive Officer and the
Senior Vice President and Chief Financial Officer (collectively
the Certifying Officers), as appropriate, to allow
timely decisions regarding required disclosure.
In conjunction with the close of each fiscal quarter, we conduct
a review and evaluation, under the supervision and with the
participation of our management, including the Certifying
Officers, of 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. Based on that evaluation,
our Certifying Officers have concluded that our disclosure
controls and procedures were effective at a reasonable assurance
level as of December 31, 2010, the end of the year covered
by this annual report.
|
|
(B)
|
Managements
Report on Internal Control over Financial Reporting
|
Management of ILFC is responsible for establishing and
maintaining adequate internal control over financial reporting.
ILFCs internal control over financial reporting is a
process, under the supervision of the Certifying Officers,
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
ILFCs financial statements for external purposes in
accordance with GAAP.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
ILFC management, including the Certifying Officers, conducted an
assessment of the effectiveness of ILFCs internal control
over financial reporting as of December 31, 2010 based on
the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
ILFC management has concluded that, as of December 31,
2010, ILFCs internal control over financial reporting was
effective based on the criteria in Internal
Control Integrated Framework issued by the COSO.
This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Managements report was
not subject to attestation by our independent registered public
accounting firm pursuant to rules of the Securities and Exchange
commission that permit us to provide only managements
report in this annual report.
42
Variable
Interest Entities
We have consolidated into our Consolidated Financial Statements,
financial information related to certain Variable Interest
Entities (VIEs) over which we have operational
control. Our assessment of disclosure controls and procedures,
as described above, includes the assessment of those VIEs.
|
|
(C)
|
Changes in
Internal Control Over Financial Reporting
|
There have been no changes in our internal controls over
financial reporting during the quarter ended December 31,
2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
43
PART III
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Aggregate fees for professional services rendered to us by
PricewaterhouseCoopers LLP (PwC) for the years ended
December 31, 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Audit Fees(a)
|
|
$
|
2,494,129
|
|
|
$
|
2,200,000
|
|
Tax and Other Fees(b)
|
|
|
148,812
|
|
|
|
139,400
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
2,642,941
|
|
|
$
|
2,339,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Audit Fees consist of fees for
professional services provided in connection with the audits of
our financial statements, services rendered in connection with
our registration statements filed with the Securities and
Exchange Commission, the delivery of consents and the issuance
of comfort letters. This also includes Sarbanes-Oxley
Section 404 work performed at ILFC for AIGs 2010 and
2009 assessment.
|
|
(b)
|
|
Tax and Other Fees consist of the
aggregate fees for services rendered for tax compliance, tax
planning, tax advice and customs related services.
|
AIGs audit committee approves all audit and non-audit
services rendered by PwC.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) and (2): Financial Statements and Financial Statement
Schedule: The response to this portion of Item 15 is
submitted as a separate section of this report.
(a)(3) and (b): Exhibits: The response to this portion of
Item 15 is submitted as a separate section of this report.
44
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-K
Items 8, 15(a), and 15(b)
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULE
The following consolidated financial statements of the Company
and its subsidiaries required to be included in Item 8 are
listed below:
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
49
|
|
Consolidated Financial Statements:
|
|
|
|
|
Balance Sheets at December 31, 2010 and 2009
|
|
|
50
|
|
Statements of Operations for the years ended December 31,
2010, 2009 and 2008
|
|
|
51
|
|
Statements of Shareholders Equity for the years ended
December 31, 2010, 2009 and 2008
|
|
|
52
|
|
Statements of Cash Flows for the years ended December 31,
2010, 2009 and 2008
|
|
|
53
|
|
Notes to Consolidated Financial Statements
|
|
|
55
|
|
The following financial statement schedule of the Company and
its subsidiaries is included in Item 15(a)(2):
|
|
|
|
|
Report of Independent Registered Public Accounting Firm on
Financial Statements Schedule
|
|
|
99
|
|
|
|
|
|
|
|
|
Schedule Number
|
|
Description
|
|
Page
|
|
|
II
|
|
Valuation
and Qualifying Accounts
|
|
|
100
|
|
All other financial statements and schedules not listed have
been omitted since the required information is included in the
consolidated financial statements or the notes thereto, or is
not applicable or required.
The following exhibits of the Company and its subsidiaries are
included in Item 15(b):
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
|
Aircraft Sale Agreement, dated as of April 13, 2010,
between Macquarie Aerospace Limited, as buyer, and the Company,
as seller (filed as an exhibit to
Form 10-Q
for the quarter ended June 30, 2010 and incorporated herein
by reference).
|
|
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 (filed as an exhibit to
Form 10-Q
for the quarter ended June 30, 2010 and incorporated herein
by reference).
|
|
4
|
.1
|
|
|
Indenture dated as of November 1, 1991, between the Company
and U.S. Bank Trust National Association (successor to
Continental Bank, National Association), as Trustee (filed as an
exhibit to Registration Statement
No. 33-43698
and incorporated herein by reference).
|
|
4
|
.2
|
|
|
First Supplemental Indenture, dated as of November 1, 2000,
to the indenture between the Company and U.S. Bank
Trust National Association (filed as an exhibit to
Form 10-K
for the year ended December 31, 2000 and incorporated
herein by reference).
|
|
4
|
.3
|
|
|
Second Supplemental Indenture, dated as of February 28,
2001, to the indenture between the Company and U.S. Bank
Trust National Association (filed as an exhibit to
Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference).
|
|
4
|
.4
|
|
|
Third Supplemental Indenture, dated as of September 26,
2001, to the indenture between the Company and U.S. Bank
Trust National Association (filed as an exhibit to
Form 10-Q
for the quarter ended September 30, 2000 and incorporated
herein by reference).
|
|
4
|
.5
|
|
|
Fourth Supplemental Indenture, dated as of November 6,
2002, to the indenture between the Company and U.S. Bank
National Association (filed as an exhibit to
Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
4
|
.6
|
|
|
Fifth Supplemental Indenture, dated as of December 27,
2002, to the indenture between the Company and U.S. Bank
National Association (filed as an exhibit to
Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).
|
45
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.7
|
|
|
Sixth Supplemental Indenture, dated as of June 2, 2003, to
the indenture between the Company and U.S. Bank National
Association (filed as an exhibit to
Form 10-Q
for the quarter ended September 30, 2003 and incorporated
herein by reference).
|
|
4
|
.8
|
|
|
Seventh Supplemental Indenture, dated as of October 8,
2004, to the indenture between the Company and U.S. Bank
National Association (filed as an exhibit to
Form 8-K
dated October 14, 2004 and incorporated herein by
reference).
|
|
4
|
.9
|
|
|
Eighth Supplemental Indenture, dated as of October 5, 2005,
to the indenture between the Company and U.S. Bank National
Association (filed as an exhibit to
Form 10-K
for the year ended December 31, 2005 and incorporated
herein by reference).
|
|
4
|
.10
|
|
|
Ninth Supplemental Indenture, dated as of October 5, 2006,
to the indenture between the Company and U.S. Bank National
Association (filed as an exhibit to
Form 10-K
for the year ended December 31, 2007 and incorporated
herein by reference).
|
|
4
|
.11
|
|
|
Tenth Supplemental Indenture, dated as of October 9, 2007,
to the indenture between the Company and U.S. Bank National
Association (filed as an exhibit to
Form 10-K
for the year ended December 31, 2007 and incorporated
herein by reference).
|
|
4
|
.12
|
|
|
Indenture dated as of November 1, 2000, between the Company
and the Bank of New York, as Trustee (filed as an exhibit to
Registration
No. 333-49566
and incorporated herein by reference).
|
|
4
|
.13
|
|
|
First Supplemental Indenture, dated as of August 16, 2002
to the indenture between the Company and the Bank of New York
(filed as Exhibit 4.2 to Registration Statement
No. 333-100340
and incorporated herein by reference).
|
|
4
|
.14
|
|
|
Agency Agreement (Amended and Restated), dated
September 15, 2006, by and among the Company, Citibank,
N.A. and Dexia Banque Internationale à Luxembourg,
société anonyme (filed as an exhibit to
Form 8-K,
event date September 20, 2006, and incorporated herein by
reference).
|
|
4
|
.15
|
|
|
Supplemental Agency Agreement, dated September 7, 2007,
among the Company, Citibank, N.A. and Dexia Banque
Internationale à Luxembourg, société anonyme
(filed as an exhibit to
Form 8-K,
event date September 7, 2007, and incorporated herein by
reference).
|
|
4
|
.16
|
|
|
Supplemental Agency Agreement, dated September 5, 2008,
among the Company, Citibank, N.A. and Dexia Banque
Internationale à Luxembourg, société anonyme
(filed as an exhibit to
Form 8-K,
event date September 8, 2008, and incorporated herein by
reference).
|
|
4
|
.17
|
|
|
Supplemental Agency Agreement, dated September 4, 2009,
among the Company, Citibank, N.A. and Dexia Banque
Internationale à Luxembourg, société anonyme
(filed as an exhibit to
Form 8-K
filed on September 10, 2009 and incorporated herein by
reference).
|
|
4
|
.18
|
|
|
Indenture, dated as of August 1, 2006, between the Company
and Deutsche Bank Trust Company Americas, as Trustee (filed
as Exhibit 4.1 to Registration Statement
No. 333-136681
and incorporated herein by reference).
|
|
4
|
.19
|
|
|
First Supplemental Indenture, dated as of August 20, 2010,
to the indenture dated as of August 1, 2006 between the
Company and Deutsche Bank Trust Company Americas as trustee
(filed as an exhibit to
Form 8-K
filed on August 20, 2010 and incorporated herein by
reference).
|
|
4
|
.20
|
|
|
Second Supplemental Indenture, dated as of December 7,
2010, to the indenture dated as of August 1, 2006 between
the Company and Deutsche Bank Trust Company Americas, as
trustee (filed as an exhibit to
Form 8-K
filed on December 7, 2010 and incorporated herein by
reference).
|
|
4
|
.21
|
|
|
Officers Certificate, dated as of August 20, 2010,
establishing the terms of the 8.875% senior notes due 2017
(filed as an exhibit to
Form 8-K
filed on August 20, 2010 and incorporated herein by
reference).
|
|
4
|
.22
|
|
|
Officers Certificate, dated as of December 7, 2010,
establishing the terms of the 8.25% senior notes due 2020
(filed as an exhibit to
Form 8-K
filed on December 7, 2010 and incorporated herein by
reference).
|
|
4
|
.23
|
|
|
Indenture, dated as of March 22, 2010, among the Company,
Wilmington Trust FSB, as trustee, and Deutsche Bank
Trust Company Americas, as paying agent, security registrar
and authentication agent (filed as an exhibit to the
Form 8-K
filed on March 24, 2010 and incorporated herein by
reference).
|
46
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.24
|
|
|
Registration Rights Agreement, dated as of March 22, 2010,
among the Company and Banc of America Securities LLC, Citigroup
Global Markets Inc., Credit Suisse Securities (USA) LLC and UBS
Securities LLC, as representatives of the initial purchasers
(filed as an exhibit to the
Form 8-K
filed on March 24, 2010 and incorporated herein by
reference).
|
|
4
|
.25
|
|
|
Registration Rights Agreement, dated as of April 6, 2010,
among the Company and Banc of America Securities LLC, Barclays
Capital Inc., Citigroup Global Markets Inc., Credit Suisse
Securities (USA) LLC, J.P. Morgan Securities Inc. and UBS
Securities LLC, as representatives of the initial purchasers
(filed as an exhibit to the
Form 8-K
filed on April 6, 2010 and incorporated herein by
reference).
|
|
4
|
.26
|
|
|
Indenture, dated as of August 11, 2010, between the Company
and The Bank of New York Mellon Trust Company, N.A., as
paying agent, security registrar and authentication agent and
trustee (filed as an exhibit to
Form 8-K
filed on August 20, 2010 and incorporated herein by
reference).
|
|
4
|
.27
|
|
|
Registration Rights Agreement, dated as of August 20, 2010,
among the Company and Banc of America Securities LLC, Citigroup
Global Markets Inc., and J.P. Morgan Securities Inc., as
representatives of the initial purchasers (filed as an exhibit
to
Form 8-K
filed on August 20, 2010 and incorporated herein by
reference).
|
|
4
|
.28
|
|
|
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
|
|
|
Aircraft Facility Agreement, dated as of May 18, 2004,
among Whitney Leasing Limited, as borrower, the Company, as
guarantor and the Bank of Scotland and the other banks listed
therein providing up to $2,643,660,000 (plus related premiums)
for the financing of aircraft (filed as an exhibit to
Form 10-Q
for the quarter ended June 30, 2004 and incorporated herein
by reference) and, as most recently amended as of May 30,
2006, to increase the size of the facility to $3,643,660,000, as
of May 30, 2007, to extend the termination until May 2008,
as of May 29, 2008, to extend the termination until May
2009, and as of May 11, 2009 to increase the size of the
facility to $4,643,660,000 and to extend the termination until
June 2010 (filed as an exhibit to
Form 10-Q
for the quarter ended June 30, 2009 and incorporated herein
by reference).
|
|
10
|
.2
|
|
|
Side Letter Agreement, dated as of February 27, 2010, among
the Company, Whitney Leasing Limited, Aircraft SPC-12, Inc.,
Bank of Scotland PLC, Bank of Scotland PLC, Paris Branch, and
Bank of Scotland PLC, Frankfurt Branch (filed as an exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
|
10
|
.3
|
|
|
$2,500,000,000 Five-Year Revolving Credit Agreement, dated as of
October 13, 2006, among the Company, CitiCorp USA, Inc., as
Administrative Agent, and the other financial institutions
listed therein (filed as an exhibit to
Form 8-K
event date October 18, 2006 and incorporated herein by
reference).
|
|
10
|
.4
|
|
|
Amendment No. 1, dated as of April 16, 2010, to the
$2,500,000,000 Five-Year Revolving Credit Agreement dated as of
October 13, 2006, among the Company, CitiCorp USA, Inc., as
administrative agent, and the other financial institutions
listed therein (portions of this exhibit have been omitted
pursuant to a request for confidential treatment) (filed as an
exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
|
10
|
.5
|
|
|
Amendment No. 2, dated as of December 17, 2010, to the
$2,500,000,000 Five-Year Revolving Credit Agreement dated as of
October 13, 2006, among the Company, CitiCorp USA, Inc., as
administrative agent, and the other financial institutions
listed therein (filed as an exhibit to
Form 8-K
filed on December 23, 2010 and incorporated herein by
reference).
|
|
10
|
.6
|
|
|
Term Loan 1 Credit Agreement, dated as of March 17, 2010,
among the Company, ILFC Ireland Limited and ILFC (Bermuda) III,
Ltd., as initial intermediate lessees, the lenders from time to
time party thereto, Bank of America, N.A., as administrative
agent and collateral agent and Goldman Sachs Lending Partners
LLC, as syndication agent (portions of this exhibit have been
omitted pursuant to a request for confidential treatment) (filed
as an exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
47
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.7
|
|
|
Term Loan 1 Aircraft Mortgage and Security Agreement, dated as
of March 17, 2010, among the Company, ILFC Ireland Limited,
ILFC (Bermuda) III, Ltd., additional grantors from time to time
party thereto and Bank of America, N.A., as collateral agent
(filed as an exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
|
10
|
.8
|
|
|
Term Loan 2 Credit Agreement, dated as of March 17, 2010,
among Delos Aircraft Inc., as borrower, the Company and certain
other subsidiaries as guarantors party thereto, the lenders from
time to time party thereto, Bank of America, N.A., as
administrative agent and collateral agent and Goldman Sachs
Lending Partners LLC, as syndication agent (portions of this
exhibit have been omitted pursuant to a request for confidential
treatment) (filed as an exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
|
10
|
.9
|
|
|
Term Loan 2 Security Agreement, dated as of March 17, 2010,
among Hyperion Aircraft Inc., Delos Aircraft Inc., Artemis
(Delos) Limited, Apollo Aircraft Inc., the additional grantors
from time to time party thereto and Bank of America, N.A., as
collateral agent (filed as an exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
|
10
|
.10
|
|
|
Security and Guarantee Agreement, dated as of April 16,
2010, among Citicorp USA, Inc., as collateral agent, and Flying
Fortress Inc., Flying Fortress US Leasing Inc., Flying Fortress
Ireland Leasing Limited and the additional guarantors named
therein, as the guarantors (filed as an exhibit to
Form 10-Q
for the quarter ended March 31, 2010 and incorporated
herein by reference).
|
|
10
|
.11
|
|
|
Employment Letter, dated May 17, 2010, 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
|
.12
|
|
|
Aircraft Mortgage and Security Agreement and Guaranty, dated as
of August 11, 2010, among the Company, ILFC Ireland
Limited, ILFC (Bermuda) III, Ltd., the additional grantors
referred to therein, and Wells Fargo Bank Northwest, National
Association (portions of this exhibit have been omitted pursuant
to a request for confidential treatment) (filed as an exhibit to
Form 10-Q
for the quarter ended September 30, 2010 and incorporated
herein by reference).
|
|
10
|
.13
|
|
|
$2,000,000,000 Three-Year Revolving Credit Agreement, dated as
of January 31, 2011, among the Company, the banks named
therein and Citibank, N.A., as administrative agent (filed as an
exhibit to
Form 8-K
filed on January 31, 2011 and incorporated herein by
reference).
|
|
12
|
|
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends.
|
|
23
|
|
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
31
|
.1
|
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
|
|
31
|
.2
|
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Senior Vice President and Chief Financial
Officer.
|
|
32
|
.1
|
|
|
Certification under 18 U.S.C., Section 1350
|
|
|
|
|
|
Indicates a management contract or
compensatory plan or arrangement.
|
48
Report of
Independent Registered Public Accounting Firm
To The
Shareholders and Board of Directors
of International Lease Finance Corporation:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
shareholders equity and cash flows present fairly, in all
material respects, the financial position of International Lease
Finance Corporation, a wholly-owned subsidiary of American
International Group, Inc. (AIG), and its
subsidiaries (the Company) at December 31, 2010
and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 9, 2011
49
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
(Dollars in thousands, except share
and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Cash, including interest bearing accounts of
$3,058,747 (2010) and $324,827 (2009)
|
|
$
|
3,067,697
|
|
|
$
|
336,911
|
|
Restricted cash, including interest bearing accounts of $402,373
(2010) and $246,115 (2009)
|
|
|
457,053
|
|
|
|
315,156
|
|
Notes receivable, net of allowance
|
|
|
65,065
|
|
|
|
102,213
|
|
Net investment in finance and sales-type leases
|
|
|
67,620
|
|
|
|
261,081
|
|
|
|
|
|
|
|
|
|
|
Flight equipment under operating leases
|
|
|
51,646,586
|
|
|
|
57,718,323
|
|
Less accumulated depreciation
|
|
|
13,120,421
|
|
|
|
13,788,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,526,165
|
|
|
|
43,929,801
|
|
Flight equipment held for sale
|
|
|
255,178
|
|
|
|
13,040
|
|
Deposits on flight equipment purchases
|
|
|
184,410
|
|
|
|
163,221
|
|
Lease receivables and other assets
|
|
|
402,932
|
|
|
|
474,025
|
|
Derivative assets, net
|
|
|
60,150
|
|
|
|
190,857
|
|
Variable interest entities assets
|
|
|
|
|
|
|
79,720
|
|
Deferred debt issue costs less accumulated amortization
of
$181,460 (2010) and $146,933 (2009)
|
|
|
232,576
|
|
|
|
101,017
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,318,846
|
|
|
$
|
45,967,042
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Accrued interest and other payables
|
|
$
|
689,606
|
|
|
$
|
474,971
|
|
Current income taxes
|
|
|
108,898
|
|
|
|
80,924
|
|
Tax benefit sharing payable to AIG
|
|
|
|
|
|
|
85,000
|
|
Loans from AIG Funding
|
|
|
|
|
|
|
3,909,567
|
|
Secured debt financing, net of deferred debt discount of
$22,309 (2010) and $0 (2009)
|
|
|
9,556,634
|
|
|
|
3,157,879
|
|
Unsecured debt financing, net of deferred debt discount of
$47,977 (2010) and $9,556 (2009)
|
|
|
16,997,466
|
|
|
|
21,644,293
|
|
Subordinated debt
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Foreign currency adjustment related to foreign currency
denominated debt
|
|
|
165,400
|
|
|
|
391,100
|
|
Security deposits, overhaul rental and other customer deposits
|
|
|
1,620,784
|
|
|
|
1,469,956
|
|
Rentals received in advance
|
|
|
284,115
|
|
|
|
315,154
|
|
Deferred income taxes
|
|
|
4,663,939
|
|
|
|
4,881,558
|
|
Variable interest entities liabilities
|
|
|
|
|
|
|
6,464
|
|
Commitments and contingencies Note N
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Market Auction Preferred Stock, $100,000 per share liquidation
value; Series A and B, each series having 500 shares
issued and outstanding
|
|
|
100,000
|
|
|
|
100,000
|
|
Common stock no par value; 100,000,000 authorized
shares, 45,267,723 shares issued and outstanding
|
|
|
1,053,582
|
|
|
|
1,053,582
|
|
Paid-in capital
|
|
|
606,367
|
|
|
|
603,542
|
|
Accumulated other comprehensive (loss) income
|
|
|
(58,944
|
)
|
|
|
(138,206
|
)
|
Retained earnings
|
|
|
6,530,999
|
|
|
|
6,931,258
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
8,232,004
|
|
|
|
8,550,176
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,318,846
|
|
|
$
|
45,967,042
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
50
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
REVENUES AND OTHER INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental of flight equipment
|
|
$
|
4,726,502
|
|
|
$
|
4,928,253
|
|
|
$
|
4,678,856
|
|
Flight equipment marketing and gain on aircraft sales
|
|
|
10,637
|
|
|
|
15,536
|
|
|
|
46,838
|
|
Interest and other
|
|
|
61,741
|
|
|
|
58,209
|
|
|
|
98,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,798,880
|
|
|
|
5,001,998
|
|
|
|
4,823,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,567,369
|
|
|
|
1,365,490
|
|
|
|
1,576,664
|
|
Effect from derivatives, net of change in hedged items due to
changes in foreign exchange rates
|
|
|
47,787
|
|
|
|
(21,450
|
)
|
|
|
39,926
|
|
Depreciation of flight equipment
|
|
|
1,954,883
|
|
|
|
1,959,448
|
|
|
|
1,864,730
|
|
Aircraft impairment charges and fair value adjustments on flight
equipment sold or to be disposed of
|
|
|
550,034
|
|
|
|
34,730
|
|
|
|
|
|
Aircraft impairment charges on flight equipment held for use
|
|
|
948,679
|
|
|
|
52,938
|
|
|
|
|
|
Flight equipment rent
|
|
|
18,000
|
|
|
|
18,000
|
|
|
|
18,000
|
|
Selling, general and administrative
|
|
|
212,780
|
|
|
|
196,675
|
|
|
|
183,356
|
|
Other expenses
|
|
|
91,216
|
|
|
|
|
|
|
|
46,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,390,748
|
|
|
|
3,605,831
|
|
|
|
3,729,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(591,868
|
)
|
|
|
1,396,167
|
|
|
|
1,094,721
|
|
(Benefit) provision for income taxes
|
|
|
(208,110
|
)
|
|
|
500,538
|
|
|
|
391,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(383,758
|
)
|
|
$
|
895,629
|
|
|
$
|
703,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
51
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Auction
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
|
|
of
|
|
|
|
|
|
Paid-in
|
|
|
(Loss)
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
|
1,000
|
|
|
$
|
100,000
|
|
|
|
45,267,723
|
|
|
$
|
1,053,582
|
|
|
$
|
593,455
|
|
|
$
|
(106,219
|
)
|
|
$
|
5,387,961
|
|
|
$
|
7,028,779
|
|
Common stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,400
|
)
|
|
|
(46,400
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,227
|
)
|
|
|
(5,227
|
)
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703,125
|
|
|
|
703,125
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow derivative transactions (net of tax of $33,145)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,555
|
)
|
|
|
|
|
|
|
(61,555
|
)
|
Change in unrealized appreciation securities
available-for-sale
(net of tax of $157)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(291
|
)
|
|
|
|
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641,279
|
|
Other(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,782
|
|
|
|
|
|
|
|
|
|
|
|
6,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
1,000
|
|
|
|
100,000
|
|
|
|
45,267,723
|
|
|
|
1,053,582
|
|
|
|
600,237
|
|
|
|
(168,065
|
)
|
|
|
6,039,459
|
|
|
|
7,625,213
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,830
|
)
|
|
|
(3,830
|
)
|
Comprehensive (loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895,629
|
|
|
|
895,629
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow derivative transactions (net of tax of ($15,929))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,583
|
|
|
|
|
|
|
|
29,583
|
|
Change in unrealized appreciation securities
available-for-sale
(net of tax of ($149))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925,488
|
|
Other(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
1,000
|
|
|
$
|
100,000
|
|
|
|
45,267,723
|
|
|
|
1,053,582
|
|
|
|
603,542
|
|
|
|
(138,206
|
)
|
|
|
6,931,258
|
|
|
|
8,550,176
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(601
|
)
|
|
|
(601
|
)
|
Deconsolidation of VIEs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,900
|
)
|
|
|
(15,900
|
)
|
Comprehensive (loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(383,758
|
)
|
|
|
(383,758
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow derivative transactions (net of tax of ($42,542))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,006
|
|
|
|
|
|
|
|
79,006
|
|
Change in unrealized appreciation securities
available-for-sale
(net of tax of ($138))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304,496
|
)
|
Other(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
1,000
|
|
|
$
|
100,000
|
|
|
|
45,267,723
|
|
|
$
|
1,053,582
|
|
|
$
|
606,367
|
|
|
$
|
(58,944
|
)
|
|
$
|
6,530,999
|
|
|
$
|
8,232,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
We recorded $6,782 during 2008, $3,305 during 2009 and $2,825
during 2010 for compensation expenses, debt issue cost and other
expenses paid by AIG on our behalf for which we were not
required to pay.
|
See accompanying notes.
52
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(383,758
|
)
|
|
$
|
895,629
|
|
|
$
|
703,125
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of flight equipment
|
|
|
1,954,883
|
|
|
|
1,959,448
|
|
|
|
1,864,730
|
|
Deferred income taxes
|
|
|
(251,603
|
)
|
|
|
387,230
|
|
|
|
376,416
|
|
Derivative instruments
|
|
|
252,254
|
|
|
|
(57,141
|
)
|
|
|
680,816
|
|
Foreign currency adjustment of non-US$ denominated debt
|
|
|
(200,320
|
)
|
|
|
114,620
|
|
|
|
(507,050
|
)
|
Amortization of deferred debt issue costs
|
|
|
56,227
|
|
|
|
40,232
|
|
|
|
31,325
|
|
Amortization of debt discount
|
|
|
11,968
|
|
|
|
9,363
|
|
|
|
13,651
|
|
Amortization of prepaid lease cost
|
|
|
47,809
|
|
|
|
51,899
|
|
|
|
51,108
|
|
Write-off of notes receivable
|
|
|
13,913
|
|
|
|
|
|
|
|
46,557
|
|
Aircraft impairment charges and fair value adjustments
|
|
|
1,498,713
|
|
|
|
87,668
|
|
|
|
|
|
Lease expenses related to aircraft sales
|
|
|
91,217
|
|
|
|
|
|
|
|
|
|
Other, including foreign exchange adjustments on foreign
currency denominated cash and gain on aircraft sales
|
|
|
(32,308
|
)
|
|
|
(36,529
|
)
|
|
|
(65,757
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables and other assets
|
|
|
64,111
|
|
|
|
(43,288
|
)
|
|
|
(63,333
|
)
|
Accrued interest and other payables
|
|
|
214,651
|
|
|
|
(70
|
)
|
|
|
(1,372
|
)
|
Current income taxes
|
|
|
27,974
|
|
|
|
48,841
|
|
|
|
170,488
|
|
Tax benefit sharing payable to AIG
|
|
|
(85,000
|
)
|
|
|
|
|
|
|
|
|
Rentals received in advance
|
|
|
(22,388
|
)
|
|
|
15,193
|
|
|
|
48,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,258,343
|
|
|
|
3,473,095
|
|
|
|
3,349,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of flight equipment
|
|
|
(240,320
|
)
|
|
|
(2,577,410
|
)
|
|
|
(3,236,848
|
)
|
Payments for deposits and progress payments
|
|
|
(61,085
|
)
|
|
|
(40,444
|
)
|
|
|
(290,748
|
)
|
Proceeds from disposal of flight equipment
|
|
|
2,123,581
|
|
|
|
212,492
|
|
|
|
428,065
|
|
Advances on notes receivable
|
|
|
|
|
|
|
|
|
|
|
(43,854
|
)
|
Restricted cash
|
|
|
(141,897
|
)
|
|
|
(315,156
|
)
|
|
|
|
|
Collections of notes receivable
|
|
|
72,015
|
|
|
|
15,999
|
|
|
|
9,885
|
|
Collections of finance and sales-type leases
|
|
|
32,928
|
|
|
|
101,170
|
|
|
|
25,443
|
|
Other
|
|
|
(5,370
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,779,852
|
|
|
|
(2,603,359
|
)
|
|
|
(3,108,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in commercial paper
|
|
|
|
|
|
|
(1,752,000
|
)
|
|
|
(2,746,555
|
)
|
Loan from AIG
|
|
|
|
|
|
|
3,900,000
|
|
|
|
1,671,268
|
|
Repayment of loan to AIG
|
|
|
(3,909,567
|
)
|
|
|
|
|
|
|
(1,671,268
|
)
|
Proceeds from debt financing
|
|
|
9,704,094
|
|
|
|
1,394,868
|
|
|
|
9,389,394
|
|
Payments to reduce debt financing
|
|
|
(7,989,514
|
)
|
|
|
(6,388,347
|
)
|
|
|
(4,754,551
|
)
|
Debt issue costs
|
|
|
(189,376
|
)
|
|
|
(49,350
|
)
|
|
|
(23,092
|
)
|
Payment of common and preferred dividends
|
|
|
(601
|
)
|
|
|
(3,830
|
)
|
|
|
(55,887
|
)
|
Security and rental deposits received
|
|
|
193,831
|
|
|
|
79,452
|
|
|
|
139,232
|
|
Security and rental deposits returned
|
|
|
(52,367
|
)
|
|
|
(58,280
|
)
|
|
|
(41,003
|
)
|
Transfers of security and rental deposits on sales of
aircraft
|
|
|
(168,209
|
)
|
|
|
(9,540
|
)
|
|
|
(12,942
|
)
|
Overhaul rentals collected
|
|
|
500,701
|
|
|
|
346,966
|
|
|
|
264,592
|
|
Overhaul rentals reimbursed
|
|
|
(313,974
|
)
|
|
|
(383,577
|
)
|
|
|
(212,021
|
)
|
Transfer of overhaul rentals on sales of aircraft
|
|
|
(96,114
|
)
|
|
|
(4,234
|
)
|
|
|
(11,324
|
)
|
Net change in other deposits
|
|
|
15,600
|
|
|
|
8,405
|
|
|
|
28,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,305,496
|
)
|
|
|
(2,919,467
|
)
|
|
|
1,963,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,732,699
|
|
|
|
(2,049,731
|
)
|
|
|
2,205,198
|
|
Effect of exchange rate changes on cash
|
|
|
(1,913
|
)
|
|
|
694
|
|
|
|
(2,022
|
)
|
Cash at beginning of year
|
|
|
336,911
|
|
|
|
2,385,948
|
|
|
|
182,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
3,067,697
|
|
|
$
|
336,911
|
|
|
$
|
2,385,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Table continued on following page)
53
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, excluding interest capitalized of $6,539 (2010),
$10,360 (2009), and $26,597 (2008)
|
|
$
|
1,373,045
|
|
|
$
|
1,370,585
|
|
|
$
|
1,548,492
|
|
Income taxes, net
|
|
|
15,519
|
|
|
|
13,754
|
|
|
|
(155,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment under operating leases in the amount of
$2,236,055 was transferred to Flight equipment held for sale, of
which $1,992,507 was subsequently sold.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in finance leases of $192,161 was transferred to
Flight equipment under operating leases.
|
|
|
|
|
|
|
|
|
|
|
|
|
Two aircraft with aggregate net book value of $66,581 were
converted into sales-type leases aggregating $30,230 with
$36,351 charged to income.
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment under operating leases with a net book value of
$60,780 was transferred to Lease receivable and other assets,
with $10,400 recorded in income, to record proceeds receivable
for the total loss of two aircraft.
|
|
|
|
|
|
|
|
|
|
|
|
|
$36,799 of Deposits on flight equipment purchases were applied
to Acquisition of flight equipment under operating leases.
|
|
|
|
|
|
|
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
$419,937 of Deposits on flight equipment purchases was applied
to Acquisition of flight equipment under operating leases. Three
aircraft with a cumulative net book value of $58,965 were
reclassified as sales-type leases.
|
An aircrafts 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. The receivable of $33,223
was paid in full in the third quarter and is included in
Proceeds from disposal of flight equipment.
|
An aircrafts 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 an asset held for
sale. See Note P of Notes to Consolidated Financial
Statements.
|
$5,335 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.
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
$462,065 of Deposits on flight equipment purchases was applied
to Acquisition of flight equipment under operating leases.
|
$53,898 was reclassified from Security deposits on aircraft,
overhauls and other to Deposits on flight equipment purchases
for concessions received from manufacturers.
|
An aircraft previously accounted for as an operating lease was
converted into a sales-type lease in the amount of $15,576.
|
Deferred debt issue Cost and Paid-in capital were reduced by
$5,742 for debt issue cost paid by AIG on our behalf, which we
were not required to pay.
|
See accompanying notes.
54
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
Organization: International Lease Finance
Corporations (the Company, ILFC,
management, we, our,
us) 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 fleet management services to investors
and/or owners of aircraft portfolios for a management fee. In
addition to our leasing and fleet management activities, at
times 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. We execute our leasing and financing
operations through a variety of subsidiaries and Variable
Interest Entities (VIEs) that are consolidated in
our financial statements. In terms of the number and value of
transactions concluded, we are a major owner-lessor of
commercial jet aircraft.
Parent Company: ILFC is an indirect
wholly-owned subsidiary of American International Group, Inc.
(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 of America
(U.S.) and abroad. AIGs primary activities
include both general and life insurance and retirement services
operations. Other significant activities include financial
services.
|
|
Note A
|
Basis of
Preparation
|
The accompanying 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 O
Variable Interest Entities for further discussions
of VIEs. All material intercompany accounts have been eliminated
in consolidation. Results for the period ended December 31,
2010 include out of period adjustments of $40.9 million
related to prior years. See Note T Out of Period
Adjustments.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. Certain amounts have been reclassified in the 2009
and 2008 Consolidated Statements of Operations and Statements of
Cash Flows to conform to our 2010 presentation. During the
annual and quarterly periods ended December 31, 2010, we
changed (i) the presentation of the Provision for
overhauls from operating expenses to a reduction of Rental of
flight equipment revenues and (ii) the presentation
of the impairment charges, fair value adjustments and lease
related charges recorded in Flight equipment marketing and gain
on aircraft sales revenues to operating expenses. The details of
these classification errors are provided below for the 2009 and
2008 prior annual periods, and in Note V
Quarterly Financial Information for the quarterly prior
periods. Management has determined after evaluating the
quantitative and qualitative aspects of the revised
classifications that our current and prior period financial
statements are free of material errors. None of the revised
classifications affected our earnings before income taxes or net
earnings in any period.
55
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note A
|
Basis of
Preparation (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Previously
|
|
|
|
Previously
|
|
|
|
|
Reported
|
|
Revised
|
|
Reported
|
|
Revised
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental of flight equipment
|
|
$
|
5,275,219
|
|
|
$
|
4,928,253
|
|
|
$
|
4,943,448
|
|
|
$
|
4,678,856
|
|
Flight equipment marketing and gain on aircraft sales
|
|
|
(11,687
|
)
|
|
|
15,536
|
|
|
|
46,838
|
|
|
|
46,838
|
|
Total revenues
|
|
|
5,321,741
|
|
|
|
5,001,998
|
|
|
|
5,088,546
|
|
|
|
4,823,954
|
|
Provision for overhauls
|
|
|
346,996
|
|
|
|
|
|
|
|
264,592
|
|
|
|
|
|
Aircraft impairment charges and fair value adjustments on flight
equipment sold or to be disposed of
|
|
|
|
|
|
|
34,730
|
|
|
|
|
|
|
|
|
|
Aircraft impairment charges on flight equipment held for use
|
|
|
|
|
|
|
52,938
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
60,445
|
|
|
|
|
|
|
|
46,557
|
|
|
|
46,557
|
|
Total expenses
|
|
|
3,925,574
|
|
|
|
3,605,831
|
|
|
|
3,993,825
|
|
|
|
3,729,233
|
|
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
3,512,881
|
|
|
|
3,473,095
|
|
|
|
3,389,521
|
|
|
|
3,349,284
|
|
Cash flows from investing activities
|
|
|
(2,629,846
|
)
|
|
|
(2,603,359
|
)
|
|
|
(3,149,797
|
)
|
|
|
(3,108,057
|
)
|
Cash flows from financing activities
|
|
|
(2,932,766
|
)
|
|
|
(2,919,467
|
)
|
|
|
1,965,474
|
|
|
|
1,963,971
|
|
|
|
Note B
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation: The accompanying
consolidated financial statements include the results of all
entities in which we have a controlling financial interest, as
well as accounts of VIEs in which we are the primary beneficiary
(PB). Prior to January 1, 2010, the PB 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. See Note O
Variable Interest Entities. Investments in equity
securities in which we have more than a 20% interest, but do not
have a controlling interest and are not the primary beneficiary,
are accounted for under the equity method of accounting.
Investments in which we have less than a 20% interest are
carried at cost. At December 31, 2010 and 2009, we had no
investments accounted for under the equity method of accounting.
Variable Interest Entities: We consolidate
VIEs in which we have determined that we are the PB. We use
judgment when determining (i) whether an entity is a
VIE; (ii) who are the variable interest holders;
(iii) the exposure to expected losses and returns of
each variable interest holder; and (iv) ultimately
which party is the PB. When determining which party is the PB,
we perform an analysis which considers (i) the
design of the VIE; (ii) the capital structure of the
VIE; (iii) the contractual relationships between the
variable interest holders; (iv) the nature of the
entities operations; and (v) purposes and
interests of all parties involved. We re-evaluate whether we are
the PB for VIEs when certain events occur. The re-evaluation
occurs when an event changes the manner in which the variable
interests are allocated across the variable interest holders. We
also reconsider our role as PB when we sell, or otherwise
dispose of, all or part of our variable interests in a VIE, or
when we acquire additional variable interests in a VIE.
Lease Revenue: We lease flight equipment
principally under operating leases and recognize rental revenue
ratably over the life of the lease. The difference between the
rental revenue recognized and the cash received under
56
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
the provisions of our leases is included in Lease receivables
and other assets on our Consolidated Balance Sheets. Past-due
rental revenue is recognized on the basis of managements
assessment of collectability. Management monitors all lessees
that are behind in lease payments and discusses relevant
operational and financial issues faced by our lessees with our
marketing executives to determine the amount of rental revenue
to recognize for past due amounts. Our customers make lease
payments in advance and we generally recognize rental revenue
only to the extent we have received payments or hold security
deposits. In certain cases, leases provide for additional rental
revenue based on usage. The usage may be calculated based on
hourly usage or on the number of cycles operated, depending on
the lease contract. A cycle is defined as one take-off and
landing. The usage is typically reported monthly by the lessee.
Rental revenue received under the lease agreements, but
unearned, is included in Rentals received in advance on our
Consolidated Balance Sheets until earned.
Lease revenues from the rental of flight equipment are reduced
by payments received directly by us or by our customers from the
aircraft and engine manufacturers. In certain circumstances, the
manufacturers establish notional accounts for our benefit, to
which they credit amounts when we purchase and take delivery of
and lease aircraft. The manufacturers have established these
notional accounts to assist us, and as an incentive for us, to
place their equipment with customers. Amounts credited to the
notional accounts are used at our direction, subject to certain
limitations set forth in our contracts with the manufacturers,
to protect us from certain events, including loss when airline
customers default on lease payment obligations, to provide lease
subsidies and other incentives to our airline customers in
connection with leases of certain aircraft and to reduce our
cost of aircraft purchased. Also see Flight Equipment
below.
Overhaul Rentals: Under the provisions of all
of our leases, lessees are responsible for maintenance and
repairs, including major maintenance (overhauls) over the term
of the lease. Under the provisions of many of our leases, we
receive overhaul rentals based on the usage of the aircraft. For
certain airframe and engine overhauls, we reimburse the lessee
for costs incurred up to, but not exceeding, related overhaul
rentals that the lessee has paid to us.
Overhaul rentals are included under the caption Rental of flight
equipment in our Consolidated Statements of Operations. We
recognize overhaul rentals received as revenue net of estimated
overhaul reimbursements. Management periodically evaluates the
overhaul reimbursement rate, and adjusts the overhaul rental
revenue recognized accordingly. Management determines the
estimated future overhaul reimbursement rate based on
quantitative and qualitative information including:
(i) changes in historical overhaul pay-out rates
from period to period; (ii) trends in overhaul
reimbursements identified during our quarterly aircraft cost
review; (iii) trends in the historical overhaul
pay-out percentages for expired leases; (iv) future
trends in the industry, including the overhaul model;
(v) future estimates of overhaul pay-out rates on
leases scheduled to expire; (vi) changes in our
business model or aircraft portfolio strategies; and
(vii) other factors identified that affect the
future overhaul pay-out percentages. Except as disclosed under
Capitalized Overhaul Costs and Initial Direct Costs
and Lease Incentive Costs, we generally do not contribute to
the cost of overhauls when we do not receive overhaul rentals.
Capitalized Overhaul Costs: When an aircraft
is repossessed or when a lessee defaults on its lease
obligations, we may be required to perform major maintenance on
the aircraft. In these instances, if we have not received
overhaul rentals under the lease, we capitalize the costs of the
overhaul, to the extent that those costs meet the recognition
criteria of an asset, and amortize those costs over the period
until the next estimated overhaul event.
Return Condition Payments: We may receive
payments from our lessees at the conclusion of a lease, rather
than requiring the lessee to make the required repairs to meet
return conditions. These return condition payments are generally
negotiated as a concession to the lessee to facilitate an
efficient return of the aircraft, which generally causes the
aircraft to be delivered to the next lessee in a condition less
than anticipated in the lease negotiations. In connection with
the negotiation surrounding the delivery of the aircraft to the
next lessee, the return condition payments are recorded as a
deferred liability on our Consolidated Balance Sheets until the
follow-on lessee
57
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
commitment is known, including the amount we will be required to
pay to the follow-on lessee to compensate for the deficient
delivery conditions. Any deferred liability amounts in excess of
the follow-on lease commitments are recognized as revenue once
the estimate of the follow-on commitment has been determined.
In the event we do not receive return condition payments from a
prior lessee, or the return condition payment is not sufficient
to cover a follow-on commitment, and we agree to reimburse a
lessee for certain future maintenance costs, we capitalize and
amortize those costs as a reduction of lease revenue over the
term of the lease.
Initial Direct Costs and Lease Incentive
Costs: We treat internal costs and other costs
incurred in connection with identifying, negotiating and
delivering aircraft to our lessees as period costs. Amounts paid
by us to lessees, or other parties, in connection with the lease
transactions and lessee specific modifications such as those
related to modifications of the aircraft cabin are capitalized
as lease incentive costs and amortized over the term of the
lease as a reduction of lease revenue.
Flight Equipment Marketing and Gain on Aircraft
Sales: We market flight equipment on our behalf
and on behalf of independent third parties. Flight equipment
marketing consists of gains generated from the sale of flight
equipment and commissions generated from leasing and sales of
managed aircraft. Flight equipment sales are recorded when
substantially all of the risks and rewards of ownership have
passed to the new owner. Provisions for retained lessee
obligations are recorded as reductions to Flight equipment
marketing at the time of the sale.
Cash: We consider cash and cash equivalents to
be cash on hand and highly liquid investments with original
maturity dates of 90 days or less. At December 31,
2010 and 2009, respectively, cash and cash equivalents consisted
of cash on hand and time deposits.
Restricted Cash: Restricted cash consists of
segregated security deposits, maintenance reserves, and rental
payments related to aircraft funded under the 1999 and 2004 ECA
facilities and proceeds from certain secured financings that
becomes available to us as we transfer collateral to certain
subsidiaries created to hold the aircraft serving as collateral,
for such indebtedness. See Note G Debt
Financing.
Foreign Currency: Assets and liabilities
denominated in foreign currencies are translated into US dollars
using the exchange rates at the balance sheet date. Foreign
currency transaction gains or losses are translated into US
dollars at the transaction date.
Flight Equipment under Operating
Leases: Flight equipment under operating leases
is stated at cost. Purchases, major additions and modifications
and interest on deposits during the construction phase are
capitalized. Under the provisions of all of our leases, lessees
provide and are responsible for normal maintenance and repairs,
including major maintenance (overhauls) over the term of the
lease, and compliance with return conditions. We generally
depreciate passenger aircraft, including those acquired under
capital leases, using the straight-line method over a
25-year life
from the date of manufacture to a 15% residual value. For
freighter aircraft, depreciation is computed using the
straight-line method to a zero residual value over its useful
life of 35 years. We had ten freighter aircraft in our
fleet at each of December 31, 2010 and 2009. We review the
residual values of our aircraft periodically to determine if
those values are appropriate, including aircraft that have been
impaired and aircraft that are out of production. When a
residual value changes we adjust our depreciation rates on a
prospective basis.
In certain circumstances the aircraft and engine manufacturers
establish notional accounts for our benefit, to which they
credit amounts when we purchase and take delivery of and lease
aircraft. The manufacturers have established these notional
accounts to assist us, and as an incentive for us, to place
their equipment with customers. Amounts credited to the notional
accounts are used at our direction, subject to certain
limitations set forth in our contracts with the manufacturers,
to protect us from certain events, including loss when airline
customers default on lease payment obligations, to provide lease
subsidies and other incentives to our airline customers in
connection with leases of certain aircraft and to reduce our
cost of aircraft purchased. The amounts credited are recorded as
a
58
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
reduction in Flight equipment under operating leases with a
corresponding entry to a receivable, until we utilize the funds.
The receivable is included in Lease receivables and other assets
on our Consolidated Balance Sheets. At December 31, 2010,
we had closed our major notional accounts and we do not
anticipate any future material activity in any notional account.
Future amounts paid to us by the manufacturers will be recorded
directly as a reduction to Flight equipment under operating
leases.
Impairments on Flight Equipment Held for
Use: Management evaluates quarterly the need to
perform a recoverability assessment of held for use aircraft
considering the requirements under GAAP and performs this
assessment at least annually for all aircraft in our fleet.
Recurring recoverability assessments are performed whenever
events or changes in circumstances indicate that the carrying
amount of our aircraft may not be recoverable, which may require
us to change our assumptions related to future estimated cash
flows. These events or changes in circumstances considered
include potential sales, changes in contracted lease terms,
changes in the status of a lease, re-lease, not subject to
lease, changes in portfolio strategies, changes in demand for a
particular aircraft type and changes in economic and market
circumstances. Economic and market circumstances include the
risk factors affecting the airline industry.
The undiscounted cash flows in the recoverability assessment
consist of cash flows from currently contracted leases, future
projected lease cash flows, including contingent rentals and an
estimated disposition value, as appropriate, for each aircraft.
Management is very active in the aircraft leasing industry and
develops the assumptions used in the recoverability assessment
based on its knowledge of active lease contracts, current and
future expectations of the global demand for a particular
aircraft type and historical experience in the aircraft leasing
market and aviation industry, as well as information received
from third party industry sources. The assumptions of
undiscounted cash flows developed are estimates and may change
due to: (i) changes in contracted lease rates due to
restructuring of lease payments and terms of leases and changes
in lease term due to early termination and extension of leases;
(ii) changes in future lease rates and residual
values due to demand for a particular aircraft type caused by
risk factors affecting the airline industry;
(iii) changes in lease rates and disposition values
caused by the global economic environment;
(iv) changes in the anticipated time period that an
aircraft can be economically leased; (v) changes in
the timing of disposal or planned disposal of aircraft in the
fleet; and (vi) changes in how the aircraft will be
deployed in our business. In the event that an aircraft does not
meet the recoverability assessment, the aircraft will be
recorded at fair value in accordance with our Fair Value Policy
resulting in an impairment charge. Our Fair Value Policy is
described below under Fair Value
Measurements. Impairment charges recognized related to
our fleet held for use are classified in Selling, general and
administrative, or if material, are presented separately on our
Statements of Operations.
Flight Equipment Held for Sale: We classify
aircraft as Flight equipment held for sale when all the criteria
under GAAP are met. Aircraft classified as Flight equipment held
for sale are recorded at the lower of their carrying amount or
estimated fair value less estimated costs to sell. If the
carrying value of the aircraft exceeds its estimated fair value,
then a fair value adjustment is recognized in Selling, general
and administrative, or if material, presented separately on our
Consolidated Statements of Operations. We cease recognizing
depreciation at the time the aircraft is transferred to Flight
equipment held for sale.
Management evaluates all contemplated aircraft sale transactions
to determine whether all the required criteria have been met
under GAAP to classify aircraft as Flight equipment held for
sale. Management uses judgment in evaluating these criteria. Due
to the significant uncertainties of potential sale transactions,
the held for sale criteria generally will not be met 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.
59
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
Investment in finance and
sales-type-leases: If a lease meets specific
criteria under GAAP at the inception of the lease, then we
recognize the lease as a Net investment in finance and
sales-type lease on our Consolidated Balance Sheets. For
sales-type leases we de-recognize the aircraft from our
Consolidated Balance Sheets and recognize the difference of the
aircraft carrying value and the Net investment in finance and
sales-type leases in our Consolidated Statements of Operations.
The amounts recognized for finance and sales-type leases consist
of lease receivables, plus the estimated unguaranteed residual
value of the leased flight equipment on the lease termination
date, less the unearned income. The unearned income is
recognized as Interest and other in our Consolidated Statements
of Operations over the lease term in a manner that produces a
constant rate of return on the Net investment in finance and
sales-type lease.
Allowance and Provision for Credit Losses: An
allowance or provision for credit losses is established if there
is evidence that we will be unable to collect all amounts due
according to the original contractual terms of the Net
investment in finance and sales-type receivables and notes
receivable (Financing Receivables). Financing
Receivables comprise net investment in finance and sales-type
leases recognized at the gross investment in the lease, less
unearned income, and notes receivable recognized at cost. The
allowance for credit losses is reported as a reduction of the
Financing Receivables carrying value on the Consolidated Balance
Sheets. Additions to the allowance and provision for credit
losses are recorded in our Consolidated Statements of Operations
in Selling, general and administrative expenses, or separately
in Other expenses, if material.
Allowances and provisions for credit losses are evaluated
periodically and on an individual note and customer level. Notes
receivables are considered impaired when we determine that it is
probable that we will not be able to collect all amounts due
according to the original contractual terms. Individual credit
exposures are evaluated based on the realizable value of any
collateral, and payment history. The estimated recoverable
amount is the value of the expected future cash flows, including
amounts that may be realized with the repossession of the
collateral. Allowances for specific credit losses are
established for the difference between the carrying amount and
the estimated recoverable amount. The accrual of interest income
based on the original terms of the Notes receivable is
discontinued based on the facts and circumstances of the
individual credit exposure, and any future interest income is
recorded based on cash receipts. Any subsequent changes to the
amounts and timing of the expected future cash flows compared
with the prior estimates result in a change in the allowance for
credit losses and are charged or credited to Selling general and
administrative expense. An allowance is generally reversed only
when cash is received in accordance with the original
contractual terms of the note. A write-off of the Notes
receivable is made when all hope of recoverability has been
abandoned or amounts have been forgiven. Write-offs are charged
against previously established allowances for credit losses.
Recoveries in part or in full of amounts previously written off
are credited to credit loss expense.
Collectability: The evaluation of the
collectability of the finance and sales-type leases considers
the credit of the lessee and the value of the underlying
aircraft. As of December 31, 2010 and 2009 there were no
allowances for credit losses on any of the finance and
sales-type leases.
Capitalized Interest: We borrow funds to
finance progress payments for the construction of flight
equipment ordered. We capitalize the interest incurred on such
borrowings. This amount is calculated using our composite
borrowing rate and is included in the cost of the flight
equipment.
Deferred Debt Issue Costs: We incur costs in
connection with issuing debt financing. These costs are
capitalized and amortized over the life of the debt using the
effective interest method and recognized as an increase to
interest expense.
Derivative Financial Instruments: We employ a
variety of derivative financial instruments to manage our
exposure to interest rate risks and foreign currency risks.
Derivatives are recognized on our Consolidated Balance Sheets at
fair value. AIG Financial Products Corp (AIGFP), a
related party, is the counterparty to all our interest
60
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
swaps and foreign currency swaps. We obtain our derivative fair
values on a quarterly basis from AIG. We apply either fair value
or cash flow hedge accounting when transactions meet specified
criteria for hedge accounting treatment. If the derivative does
not qualify for hedge accounting, the gain or loss is
immediately recognized in earnings. If the derivative qualifies
for hedge accounting and is designated and documented as a
hedge, changes in fair value of the hedge are either recognized
in income along with the change in fair value of the item being
hedged for fair value hedges, or recorded in Accumulated other
comprehensive income (AOCI) to the extent the hedge
is effective for cash flow hedges. We reclassify final
settlements on derivative instruments to financing activities in
our Consolidated Statements of Cash Flow.
At the time the derivative is designated as a hedge, we formally
document the relationship between hedging instrument and hedged
item including risk management objectives and strategies for
undertaking the hedge transactions. This includes linking the
derivative designated as a fair value, a cash flow, or a foreign
currency hedge to a specific asset or liability on the balance
sheet. We also assess both at the hedges inception and on
an ongoing basis whether the hedge has been and is expected to
be highly effective in offsetting changes in the fair value or
cash flow of hedged item. We use the hypothetical
derivative method when we assess the effectiveness of a
hedge. When it is determined that a hedge is not or has ceased
to be highly effective as a hedge, we discontinue hedge
accounting, as discussed below.
We discontinue hedge accounting prospectively when
(i) we determine that the derivative is no longer
effective in offsetting changes in the fair value or cash flows
of a hedged item; (ii) the derivative expires or is
sold, terminated, or exercised; or (iii) management
determines that designating the derivative as a hedging
instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and
the derivative remains outstanding, we carry the derivative at
its fair value on the balance sheet, recognizing changes in the
fair value in current-period earnings. The remaining balance in
AOCI at the time we discontinue hedge accounting for cash flow
hedges is amortized into income over the remaining life of the
derivative contract.
Other Comprehensive Income (Loss): We report
gains and losses associated with changes in the fair value of
derivatives designated as cash flow hedges and unrealized gains
and losses on marketable securities classified as
available-for-sale
in comprehensive income or loss.
Guarantees: We recognize the fee paid to us as
the initial carrying value of the guarantee which is included in
Accrued interest and other payables on our Consolidated Balance
Sheets. Since the amount received represents the market rate
that would be charged for similar agreements, management
believes that the carrying value approximates the fair value of
these instruments at the date of issuance of the guarantee. The
fee received is recognized ratably over the guarantee period.
When it becomes probable that we will be required to perform
under a guarantee, we accrue a separate liability, if it is
reasonably estimable, measured as the shortfall between the fair
value and the guaranteed value of the aircraft. We reverse the
liability only when there is no further exposure under the
guarantee. See Note N Commitments and
Contingencies for more information on guarantees.
Fair Value Measurements: Fair value is defined
as the amount 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. We measure the fair value
of our derivatives on a recurring basis and measure the fair
values of aircraft, investment in finance and sales-type leases
and asset value guarantees on a non-recurring basis. See
Note P Fair Value Measurements for more
information on fair value.
Income Taxes: We are included in the
consolidated federal income tax return of AIG. Our provision for
federal income taxes is calculated, on a separate return basis
adjusted to give recognition to the effects of net operating
losses, foreign tax credits and the benefit of the Foreign Sales
Corporation (FSC) and Extraterritorial Income
Exclusion (ETI) provisions of the Internal Revenue
Code to the extent we estimate that they will be
61
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
realizable in AIGs consolidated return. To the extent the
benefit of a net operating loss is not utilized in AIGs
tax return, AIG will reimburse us upon the expiration of the
loss carry forward period as long as we are still included in
AIGs consolidated federal tax return and the benefit would
have been utilized if we had filed a separate consolidated
federal income tax return. Income tax payments are made pursuant
to a tax payment allocation agreement whereby AIG credits or
charges us for the corresponding increase or decrease (not to
exceed the separate return basis calculation) in AIGs
current taxes resulting from our inclusion in AIGs
consolidated tax return. Intercompany payments are made when
such taxes are due or tax benefits are realized by AIG.
We and our U.S. subsidiaries are included in the combined
state unitary tax returns of AIG, including California. We also
file separate returns in certain other states, as required. The
provision for state income taxes is calculated, giving effect to
the AIG unitary rate and credits and charges allocated to us by
AIG, based upon the combined filings and the resultant current
tax payable.
We calculate our provision using the asset and liability
approach. This method gives consideration to the future tax
consequences of temporary differences between the financial
reporting basis and the tax basis of assets and liabilities
based on currently enacted tax rates. Deferred tax liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. Current income taxes on the balance sheet principally
represent amounts receivable or payable from/to AIG under the
tax sharing agreements. Interest and penalties, when applicable,
are included in the provision for income taxes.
We have uncertain tax positions consisting primarily of benefits
from our FSC and ETI. We recognize uncertain tax benefits only
to the extent that it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position.
Stock-based Compensation: We participate in
AIGs share-based payment and liability award programs and
our share of the calculated costs is allocated to us by AIG.
Compensation expense is recognized over the period during which
an employee is required to provide service in exchange for the
share-based payment. See Note M Employee Benefit
Plans.
Recent
Accounting Pronouncements:
We adopted the following accounting standards during 2010:
Accounting
for Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board
(FASB) issued an accounting standard addressing
transfers of financial assets that, among other things, removes
the concept of a qualifying special-purpose entity
(QSPE) from the FASB Accounting Standards
Codification (ASC) and removes the exception from
applying the consolidation rules to QSPEs. The new standard was
effective for interim and annual periods beginning on
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
62
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
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 from our consolidated balance sheet Assets of VIEs and
Liabilities of VIEs 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. 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 O 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 was effective for us for interim and
annual periods ending after June 15, 2010. Because this new
standard only modifies disclosures, its adoption had no effect
on our consolidated financial position, results of operations or
cash flows.
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 financing receivables and the allowance for credit
losses. The update is effective for interim and annual reporting
periods ending on or after December 15, 2010. Because this
update only modifies disclosure requirements, its adoption had
no effect on our consolidated financial position, results of
operations or cash flows.
We adopted the following accounting standards during 2009:
Business Combinations: In December 2007, the
Financial Accounting Standards Board (FASB) issued
an accounting standard that changed the accounting for business
combinations in a number of ways, including broadening the
transactions or events that are considered business
combinations; requiring an acquirer to recognize 100% of the
fair value of certain assets acquired, liabilities assumed, and
non-controlling (i.e., minority) interests; and recognizing
contingent consideration arrangements at their acquisition-date
fair values with subsequent changes in fair value generally
reflected in income, among other changes. We adopted the new
standard for business combinations for which the acquisition
date is on or after January 1, 2009. Our adoption of this
guidance did not have any effect on our consolidated financial
position, results of operations or cash flows, but may have an
effect on the accounting for future business combinations, if
any.
Non-controlling Interests in Consolidated Financial
Statements: In December 2007, the FASB issued an
accounting standard that requires non-controlling (i.e.,
minority) interests in partially owned consolidated
63
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LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
subsidiaries to be classified in the consolidated balance sheet
as a separate component of equity, or in the mezzanine section
of the balance sheet (between liabilities and equity) if such
interests do not qualify for permanent equity
classification. The new standard also specifies the accounting
for subsequent acquisitions and sales of non-controlling
interests and how non-controlling interests should be presented
in the consolidated statement of operations. The non-controlling
interests share of subsidiary income (loss) should be
reported as a part of consolidated net income (loss) with
disclosure of the attribution of consolidated net income to the
controlling and non-controlling interests on the face of the
consolidated statement of operations. This new standard became
effective for us beginning with financial statements issued for
the first quarter of 2009. This standard had to be adopted
prospectively, except that non-controlling interests should be
reclassified from liabilities to a separate component of
shareholders equity and consolidated net income should be
recast to include net income attributable to both the
controlling and non-controlling interests retrospectively. We
had no recorded minority interest in our consolidated VIEs and
therefore the adoption of this accounting standard did not have
any effect on our consolidated financial position, results of
operations or cash flows.
Disclosures about Derivative Instruments and Hedging
Activities: In March 2008, the FASB issued an
accounting standard that requires enhanced disclosures about
(i) how and why a company uses derivative
instruments; (ii) how derivative instruments and
related hedged items are accounted for; and
(iii) how derivative instruments and related hedged
items affect a companys consolidated financial condition,
results of operations, and cash flows. We adopted the new
standard for the interim period ended March 31, 2009.
Because this new accounting standard only requires additional
disclosures about derivatives, it did not have any effect on our
consolidated financial position, results of operations, or cash
flows. See Note Q Derivative Financial
Instruments herein for related disclosures.
Employers Disclosures about Postretirement Benefit Plan
Assets: In December 2008, the FASB issued an
accounting standard that requires more detailed disclosures
about an employers plan assets, including the
employers investment strategies, major categories of plan
assets, concentrations of risk within plan assets, and valuation
techniques used to measure the fair values of plan assets. We
adopted this standard for the annual period ended
December 31, 2009. Because this standard only requires
additional disclosures, it did not have any effect on our
consolidated financial position, results of operations, or cash
flows. See Note M Employee Benefit Plans.
Disclosures about Transfers of Financial Assets and Variable
Interest Entities: In December 2008, the FASB
issued an accounting standard that amends and expands the
disclosure requirements regarding transfers of financial assets
and a companys involvement with VIEs. The standard was
effective for interim and annual periods ending after
December 15, 2008. Because this standard only requires
additional disclosures, it did not have any effect on our
consolidated financial position, results of operations, or cash
flows. See Note O Variable Interest Entities.
Interim Disclosures about Fair Value of Financial
Instruments: In April 2009, the FASB issued an
accounting standard that requires a company to disclose
information about the fair value of financial instruments
(including methods and significant assumptions used) in interim
financial statements. The standard also requires the disclosures
in summarized financial information for interim reporting
periods. We adopted the new standard for the interim period
ended June 30, 2009. As the standard only requires
additional disclosures, our adoption of the standard did not
have any effect on our consolidated financial position, results
of operations or cash flows.
Recognition and Presentation of
Other-Than-Temporary
Impairments: In April 2009, the FASB issued an
accounting standard that requires a company to recognize the
credit component of an
other-than-temporary
impairment of a fixed maturity security in income and the
non-credit component in AOCI when the company does not intend to
sell the security, or it is more likely than not that the
company will not be required to sell the security prior to
recovery. The standard also changed the threshold for
determining when an
other-than-temporary
impairment has occurred on a fixed maturity security with
respect to intent and ability to hold until recovery and
requires additional disclosures in interim and annual reporting
periods for fixed maturity and equity securities.
64
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
The standard does not change the recognition of
other-than-temporary
impairment for equity securities. We adopted the new standard
for the interim period ended June 30, 2009. The adoption
did not have any effect on our consolidated financial position,
results of operations or cash flows.
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly: In
April 2009, the FASB issued an accounting standard that provides
guidance for estimating the fair value of assets and liabilities
when the volume and level of activity for an asset or liability
have significantly decreased and for identifying circumstances
that indicate a transaction is not orderly. The new standard
also requires extensive additional fair value disclosures. We
adopted the new standard for the interim period ended
June 30, 2009. The adoption did not have any effect on our
consolidated financial position, results of operations or cash
flows.
Subsequent Events: In May 2009, the FASB
issued an accounting standard that requires disclosure of the
date through which a company evaluated the need to disclose
events that occurred subsequent to the balance sheet date and
whether that date represents the date the financial statements
were issued or were available to be issued. We adopted the new
standard for the interim period ended June 30, 2009. The
adoption of the new standard did not affect our consolidated
financial position, results of operations or cash flows.
FASB Accounting Standards Codification: In
June 2009, the FASB issued an accounting standard that
established the FASB ASC, which became the source of
authoritative GAAP for non-governmental entities effective for
the period ended September 30, 2009. Rules and interpretive
releases of the SEC, under authority of federal securities laws,
are also sources of authoritative GAAP for SEC registrants. On
the effective date of this standard, the ASC superseded all
then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not
included in the ASC became non-authoritative. We adopted the new
standard for the interim period ended September 30, 2009,
its effective date. The adoption did not have any effect on our
consolidated financial position, results of operations or cash
flows.
Measuring Liabilities at Fair Value: In August
2009, the FASB issued an accounting standards update to clarify
how the fair value measurement principles should be applied 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 is effective for interim and annual
periods ending after December 15, 2009. We adopted this
standard for the annual period ended December 31, 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 value our debt when disclosing
its fair value. See Note R Fair Value
Disclosures of Financial Instruments.
We adopted the following accounting standards during 2008:
Fair Value Measurements: In September 2006,
the FASB issued an accounting standard that defines fair value,
established a framework for measuring fair value and expanded
disclosures regarding fair value measurement but did not change
existing guidance about whether an asset or liability is carried
at fair value. The fair value measurement and related disclosure
guidance in the newly issued standard does not apply to fair
value measurements associated with share-based awards accounted
for in accordance with the accounting standard that governs
Share-Based Payments. The most significant effect of our
adopting this standard was a change in the valuation
methodologies for derivative instruments historically carried at
fair value. The change primarily was to incorporate
counterparties credit risk and market liquidity risk
factors in the fair value measurement. We adopted the standard
on January 1, 2008. Our derivative instruments are
designated as cash flow hedges and the changes resulted in an
incremental reduction of the fair value of the derivative assets
of $19.8 million for the year ended December 31, 2008.
The adjustment was recorded in OCI.
65
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note B
|
Summary
of Significant Accounting Policies (Continued)
|
Application of Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or
Measurement: In February 2008, the FASB issued a
Staff Position, which amends the scope of fair value
measurements to exclude Accounting for
Leases, and its related interpreted accounting
pronouncements.
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active: In October
2008, the FASB issued a staff position that provides guidance
clarifying certain aspects of fair value measurements with
respect to the fair value measurements of a security when the
market for that security is inactive. We adopted this guidance
prospectively in the third quarter of 2008. The adoption of this
staff position did not have any impact on our consolidated
financial position or results of operations.
The Fair Value Option for Financial Assets and Financial
Liabilities: In February 2007, the FASB issued a
standard that permits entities to choose to measure at fair
value many financial instruments and certain other items that
are not currently required to be measured at fair value.
Subsequent changes in fair value for designated items will be
required to be reported in earnings in the current period. The
standard establishes presentation and disclosure requirements
for similar types of assets and liabilities measured at fair
value and permits the fair value option election on an
instrument-by-instrument
basis at initial recognition of an asset or liability, or upon
an event that gives rise to a new basis of accounting for that
instrument. We adopted the standard on January 1, 2008. The
adoption of this statement had no impact on our financial
position, results of operations or cash flows, because we did
not elect to measure any assets or liabilities not already
required under GAAP to be reported at fair value.
Modification to Offsetting of Amounts Related to Certain
Contracts: In April 2007, the FASB issued a staff
position that permits companies to offset cash collateral
receivables or payables against derivative instruments under
certain circumstances. We adopted the staff position in January
2008. At December 31, 2008, we did not have any cash
collateral receivables or payables to offset against derivative
instruments.
Disclosures about Credit Derivatives and Certain
Guarantees: In September 2008, the FASB issued a
Staff Position that required additional disclosures by sellers
of credit derivatives, including derivatives embedded in a
hybrid instrument, and required additional disclosure about the
current status of the payment/performance risk of a guarantee.
We adopted the staff position at December 31, 2008. The
adoption of this staff position did not have any effect on our
consolidated financial position, results of operations or cash
flows. See Note N Commitments and
Contingencies herein for additional disclosures.
Disclosures by Public Entities (Enterprises) about Transfers
of Financial Assets and Interests in Variable Interest
Entities: In December 2008, the FASB issued a
staff position that changed the criteria for determining the
primary beneficiary of a VIE. The primary beneficiary is the
party that consolidates the VIE. The amendment would identify
the party that has the ability to direct matters that most
significantly affect the activities of the VIE as the primary
beneficiary. At December 31, 2008, we consolidated ten
VIEs, each owning one aircraft which it leases out. The adoption
of this amendment did not have any effect on our consolidated
financial position, results of operations or cash flows. See
Note O Variable Interest
Entities for additional disclosures.
Amendments to the Impairment Guidance: In
January 2009, the FASB issued a staff position that amended the
existing impairment guidance for Recognition of Interest Income
and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets, to achieve more consistent
determination of whether an
other-than-temporary
impairment has occurred. The staff position also retains and
emphasizes the objective of an
other-than-temporary
impairment assessment and the related disclosure requirements as
defined under the guidance for Accounting for Certain
Investments in Debt and Equity Securities and other
related guidance. We adopted this guidance in the fourth quarter
of 2008. The adoption of did not have any effect of our
consolidated financial condition or results of operations or
cash flows.
66
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note C
|
Related
Party Transactions
|
Intercompany Allocations and Fees: We are
party to cost sharing agreements, including tax, 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 fees
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 have sold
to the trusts. AIG paid certain expenses on our behalf which
increased Paid-in capital. See Note I
Shareholders Equity.
Loans from AIG Funding Inc.: In September
2008, we borrowed approximately $1.7 billion from AIG
Funding Inc., a subsidiary of AIG, which we repaid in full
October 2008. During the year ended December 31, 2009, we
entered into credit agreements aggregating approximately
$3.9 billion with AIG Funding Inc, which were paid in full
on August 20, 2010. See Note G Debt
Financings.
Derivatives and Insurance Premiums: All of our
interest rate swap and foreign currency swap agreements are with
AIGFP, a related party. See Note P Fair
Value Measurements and Note Q Derivative
Financial Instruments. In addition, we purchase insurance
through a broker who may place part of our policies with AIG.
Total insurance premiums were $7.3 million,
$6.8 million and $5.7 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Our financial statements include the following amounts involving
related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on loan from AIG
|
|
$
|
157,926
|
|
|
$
|
100,504
|
|
|
$
|
6,825
|
|
Effect from derivatives on contracts with AIGFP(a)
|
|
|
45,725
|
|
|
|
(22,097
|
)
|
|
|
39,926
|
|
Interest on derivative contracts with AIGFP
|
|
|
91,988
|
|
|
|
86,327
|
|
|
|
24,385
|
|
Lease revenue related to hedging of lease receipts with AIGFP(a)
|
|
|
224
|
|
|
|
723
|
|
|
|
6,718
|
|
Allocation of corporate costs from AIG
|
|
|
30,512
|
|
|
|
8,683
|
|
|
|
13,167
|
|
Management fees received
|
|
|
(9,429
|
)
|
|
|
(9,457
|
)
|
|
|
(9,808
|
)
|
Management fees paid to subsidiaries of AIG
|
|
|
425
|
|
|
|
910
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheet
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
|
Asset (liability):
|
|
|
|
|
|
|
|
|
Loans payable to AIG Funding
|
|
$
|
|
|
|
$
|
3,909,567
|
|
Derivative assets, net(a)
|
|
|
58,187
|
|
|
|
186,771
|
|
Income taxes (payable) to AIG
|
|
|
(108,784
|
)
|
|
|
(80,924
|
)
|
Taxes benefit sharing payable to AIG
|
|
|
|
|
|
|
(85,000
|
)
|
Accrued corporate costs payable to AIG
|
|
|
(20,753
|
)
|
|
|
(5,298
|
)
|
Accrued interest payable to AIG
|
|
|
|
|
|
|
(672
|
)
|
|
|
|
(a)
|
|
See Note Q
Derivative Financial Instruments for all derivative
transactions
|
67
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note D
|
Aircraft
Impairment
|
We recorded the following impairment charges and fair value
adjustments on flight equipment during the years ended
December 31, 2010 and 2009. We did not record any
impairment charges or fair value adjustments on flight equipment
during 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
|
|
Impairment
|
|
|
|
Impairment
|
|
|
|
|
Charges and
|
|
|
|
Charges and
|
|
|
Aircraft
|
|
Fair Value
|
|
Aircraft
|
|
Fair Value
|
|
|
Impaired
|
|
Adjustments
|
|
Impaired
|
|
Adjustments
|
|
|
(Dollars in millions)
|
|
Impairment charges and fair value adjustments on Flight
equipment held for sale or aircraft designated for part-out
|
|
|
62
|
|
|
$
|
(394.9
|
)
|
|
|
2
|
|
|
$
|
(10.6
|
)
|
Impairment charges and fair value adjustments of aircraft likely
to be sold or sold
|
|
|
15
|
|
|
|
(155.1
|
)
|
|
|
5
|
|
|
|
(24.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Impairment charges and fair value adjustments on flight
equipment sold or to be disposed of
|
|
|
77
|
|
|
|
(550.0
|
)
|
|
|
7
|
|
|
|
(34.7
|
)
|
Impairment charges on aircraft held for use due to Airbus
announcement of its neo aircraft
|
|
|
61
|
|
|
|
(557.4
|
)
|
|
|
0
|
|
|
|
0
|
|
Impairment charges on aircraft due to recurring assessments
|
|
|
17
|
|
|
|
(391.3
|
)
|
|
|
3
|
|
|
|
(52.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Impairment charges on flight equipment held for use
|
|
|
78
|
|
|
|
(948.7
|
)
|
|
|
3
|
|
|
|
(52.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Impairment charges and fair value adjustments on flight
equipment
|
|
|
155
|
|
|
$
|
(1,498.7
|
)
|
|
|
10
|
|
|
$
|
(87.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
charges and fair value adjustments on Flight equipment sold or
to be disposed of
During the year ended December 31, 2010, we entered into
the following sales transactions that resulted in impairment
charges and fair value adjustments: (i) to generate
liquidity to repay maturing debt obligations, we agreed to sell
59 aircraft from our leased fleet to third parties, which we
transferred to Flight equipment held for sale at the time they
met the criteria, and of which we have completed 51 sales
through December 31, 2010, and (ii) as a part
of our ongoing fleet strategy we deemed seven aircraft more
likely than not to be sold, transferred an additional aircraft
to Flight equipment held for sale, sold eight aircraft from our
fleet held for use, two of which were accounted for as
sales-type leases, and designated two aircraft for part-out.
Amounts recorded as they relate to these transactions are as
follows:
Impairment
charges and fair value adjustments on Flight equipment held for
sale, or aircraft designated for part-out:
|
|
|
|
|
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. We performed an
analysis to determine the fair value of these aircraft, and due
to current market conditions we recorded impairment charges and
fair value adjustments aggregating $323.9 million for the
year ended December 31, 2010. At the time they met the
criteria, we transferred these 53 aircraft to Flight equipment
held for sale.
|
|
|
|
On July 6, 2010, we signed an agreement to sell six
aircraft to a third party. As a result, we performed an analysis
to determine the fair value of these aircraft and recorded
impairment charges and fair value adjustments aggregating
$36.1 million during the year ended December 31, 2010,
related to these aircraft. At the time they met the criteria, we
transferred these six aircraft to Flight equipment held for sale.
|
|
|
|
During the year ended December 31, 2010, we agreed to sell
one aircraft to a third party as part of our ongoing fleet
strategy and we recorded impairment charges and fair value
adjustments of $9.8 million to
|
68
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note D
|
Aircraft
Impairment (Continued)
|
|
|
|
|
|
record the aircraft at its fair value. At the time it met the
criteria, we transferred this aircraft to Flight equipment held
for sale.
|
|
|
|
|
|
In addition, we deemed two aircraft that we designated for
part-out to be impaired. During the year ended December 31,
2010, we recorded impairment charges and fair value adjustments
aggregating $25.1 million related to these aircraft. At the
time they met the criteria, we transferred these two aircraft to
Flight equipment held for sale.
|
Impairment
charges and fair value adjustments of aircraft likely to be sold
or sold:
|
|
|
|
|
During the year ended December 31, 2010, we sold eight
aircraft from our fleet held for use, two of which were
accounted for as sales type leases. As a result, we recorded
charges of $101.6 million.
|
|
|
|
During the year ended December 31, 2010, we recorded
impairment charges of $53.5 million related to seven
aircraft that we were in discussions to sell to third parties.
As of December 31, 2010, we considered the sales more
likely than not to occur and deemed the aircraft to be impaired.
|
During the year ended December 31, 2009 we recorded fair
value adjustments of $34.7 million when seven aircraft in
our fleet held for use were agreed to be sold.
No impairment charges or fair value adjustments on flight
equipment to be disposed of or lease related costs were recorded
for the year ended December 31, 2008.
Impairments
on Flight equipment held for use
During the year ended December 31, 2010, we recorded the
following impairments to our fleet held for use:
|
|
|
|
|
At the end of the third quarter of 2010, we had 13 passenger
configured
747-400s
and 11 A321-100s in our fleet. After consideration of
current marketplace factors, managements estimate of the
future lease rates for
747-400s
and A321-100s had declined significantly. The decline in
expected lease rates for the
747-400s
was due to a number of unfavorable trends, including lower
overall demand, as airlines replace their
747-400s
with more efficient newer generation wide-body aircraft. As a
result, the global supply of
747-400
aircraft that are for sale, or idle, had increased. It was
expected that these unfavorable trends would persist and that
the global supply of
747-400s
that were for sale or idle would continue to increase in the
future. The decline in A321-100 lease rates was primarily due to
continued and accelerated decrease in demand for this aircraft
type, which is attributable to its age and limited mission
application.
|
As a result of the decline in lease rates, seven
747-400s,
five A321-100s, and two other aircraft in our fleet held
for use were deemed impaired in the third quarter of 2010 when
we performed our annual recoverability assessment of our entire
fleet. As a result, we recorded impairment charges aggregating
$348.4 million to write these aircraft down to their
respective fair values. The estimated undiscounted cash flows on
the remaining six
747-400s
and six A321-100s supported the current carrying value of
those aircraft. The fair value of flight equipment is determined
using an income approach based on the present value of cash
flows from contractual lease agreements, contingent rentals
where appropriate, and projected future lease payments, which
extend to the end of the aircrafts economic life in its
highest and best use configuration, as well as a disposition
value, based on the expectations of market participants.
|
|
|
|
|
On December 1, 2010, Airbus S.A.S. (Airbus)
announced the new narrow body neo aircraft with new fuel
efficient geared turbofan engine options. The re-engineered
aircraft is expected to provide up to 15% fuel savings and
greater range or more payload capacity. Airbus expects to start
deliveries of the neo aircraft in 2016.
|
69
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note D
|
Aircraft
Impairment (Continued)
|
At December 31, 2010, we had identified approximately 78
narrow body aircraft with first generation engines that may be
negatively impacted by the introduction of narrow body aircraft
equipped with the new engines and, as part of our on-going fleet
assessment, we performed a recoverability analysis on those
aircraft, using revised cash flow assumptions. Based on the
recoverability analysis, 61 of these 78 aircraft were deemed
impaired and we recorded impairment charges of approximately
$557.4 million.
|
|
|
|
|
At the end of the fourth quarter of 2010, we performed a
recoverability assessment of our entire fleet. The results of
this assessment indicated that two aircraft were not recoverable
and were deemed impaired as of December 31, 2010. As a
result, we performed a fair value analysis and recorded
impairment charges of $34.8 million in the fourth quarter
2010.
|
|
|
|
We recorded an impairment charge of $8.1 million relating
to an aircraft that was subject to litigation. The aircraft was
subsequently designated for part-out and removed from our fleet
held for use.
|
Impairment charges on flight equipment held for use for the year
ended December 31, 2009 were $52.9 million. As the
result of a recoverability analysis performed during the fourth
quarter of 2009, it was deemed that the carrying value of three
aircraft in our fleet were not recoverable. As such, fair value
estimates were calculated on all three aircraft, and impairment
charges were recorded to reduce the carrying value of these
aircraft to their respective fair values.
There were no impairments on flight equipment held for use for
the year ended December 31, 2008.
|
|
Note E
|
Notes
Receivable
|
Notes receivable are primarily from the sale of flight equipment
and are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
|
Fixed rate notes with varying interest rates from 5.3% to 10.3%
|
|
$
|
55,065
|
|
|
$
|
42,213
|
(a)
|
LIBOR based notes with spreads ranging from 1.8% to 3.3%
|
|
|
10,000
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,065
|
|
|
$
|
102,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Certain 2009 receivables were
reclassed to Lease receivables and other assets to conform with
our 2010 presentation.
|
At December 31, 2010, the minimum future payments on notes
receivable are as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
$
|
22,347
|
|
2012
|
|
|
21,356
|
|
2013
|
|
|
11,362
|
|
2014
|
|
|
10,000
|
|
2015
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,065
|
|
|
|
|
|
|
As of December 31, 2010, customers with gross notes
receivable balances of $1.3 million were two or more months
behind on principal and interest payments. The gross balance of
notes receivable not accruing interest income was
$38.0 million for the year ended December 31, 2010.
During the years ended December 31, 2010 and 2008, based on
information received and the analysis performed, we recorded
charges aggregating $13.9 million and $46.6 million,
respectively, to write down secured notes to their net
realizable value. There were no material write downs of notes
receivables during the year ended December 31, 2009.
70
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note F
|
Net
Investment in Finance and Sales-type Leases
|
The following table lists the components of the net investment
in finance and sales-type leases:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
|
Total lease payments to be received
|
|
$
|
59,234
|
|
|
$
|
171,549
|
|
Estimated residual values of leased flight equipment
(unguaranteed)
|
|
|
29,543
|
|
|
|
138,665
|
|
Less: Unearned income
|
|
|
(21,157
|
)
|
|
|
(49,133
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in finance and sales-type leases
|
|
$
|
67,620
|
|
|
$
|
261,081
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, minimum future lease payments on
finance and sales-type leases are as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
$
|
12,759
|
|
2012
|
|
|
12,179
|
|
2013
|
|
|
10,172
|
|
2014
|
|
|
7,545
|
|
2015
|
|
|
5,874
|
|
Thereafter
|
|
|
10,704
|
|
|
|
|
|
|
Total minimum lease payments to be received
|
|
$
|
59,234
|
|
|
|
|
|
|
Our debt financing was comprised of the following at the
following dates:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
(Dollars in thousands)
|
|
Secured
|
|
|
|
|
|
|
|
|
Senior Secured Notes
|
|
$
|
3,900,000
|
|
|
$
|
|
|
ECA Financings
|
|
|
2,777,285
|
|
|
|
3,004,763
|
|
Bank Debt(a)(b)
|
|
|
1,465,400
|
|
|
|
|
|
Other Secured Financings(c)
|
|
|
1,436,258
|
|
|
|
153,116
|
|
Loans from AIG Funding
|
|
|
|
|
|
|
3,909,567
|
|
Less: Deferred Debt Discount
|
|
|
(22,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,556,634
|
|
|
|
7,067,446
|
|
Unsecured
|
|
|
|
|
|
|
|
|
Bonds and Medium-Term Notes
|
|
|
16,810,843
|
|
|
|
16,566,099
|
|
Bank Debt(a)(b)
|
|
|
234,600
|
|
|
|
5,087,750
|
|
Less: Deferred Debt Discount
|
|
|
(47,977
|
)
|
|
|
(9,556
|
)
|
|
|
|
|
|
|
|
|
|
Total Senior Debt Financings
|
|
|
16,997,466
|
|
|
|
21,644,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,554,100
|
|
|
|
28,711,739
|
|
Subordinated Debt
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,554,100
|
|
|
$
|
29,711,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
On April 16 2010, we entered into
an amendment to our credit facility dated October 13, 2006.
Upon effectiveness of this amendment, approximately
$2.2 billion of our previously $2.5 billion unsecured
bank debt became secured by the equity interests in certain of
our non-
|
71
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
|
|
|
|
|
restricted subsidiaries, of which
approximately $1.5 billion remained outstanding at
December 31, 2010. Those subsidiaries hold a pool of
aircraft with an appraised value of at least 133% of the
principal amount of the outstanding loans.
|
|
(b)
|
|
In the fourth quarter of 2010, we
repaid in full and terminated our $2.0 billion revolving
credit facility dated October 14, 2005 and repaid
$800 million aggregate principal amount of loans
outstanding under our $2.5 billion credit facility dated
October 13, 2006. These floating rate obligations had
interest rates of 0.91% and 3.25%, respectively, at the time of
each prepayment. As a result of the repayment of these
obligations, as well as other scheduled maturities, our
composite interest rate increased from 4.35% at
December 31, 2009 to 5.66% at December 31, 2010.
|
|
(c)
|
|
Of this amount, $113.7 million
(2010) and $129.6 million (2009) is non-recourse
to ILFC. These secured financings were incurred by VIEs and
consolidated.
|
The above amounts represent the anticipated settlement of our
outstanding debt obligations as of December 31, 2010 and
2009. Certain adjustments required to present currently
outstanding hedged debt obligations have been recorded and
presented separately on the 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 U.S. dollars using exchange rates as of each balance
sheet date. The foreign exchange adjustment for the foreign
currency denominated debt hedged with derivative contracts was
$165.4 million and $391.1 million at December 31,
2010 and 2009, respectively. Composite interest rates and
percentages of total debt at fixed rates reflect the effect of
derivative instruments. The higher composite interest rate at
December 30, 2010, compared to December 31, 2009, is
due to recently issued secured and unsecured debt with higher
interest rates than our older debt due to our current long-term
debt ratings and repayments of debt with relatively lower
interest rates. We expect our composite interest rate to
increase further as we pay down or refinance our existing lower
cost debt.
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 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 consolidated financial statements. See
Note O Variable Interest Entities for
more information on VIEs.
The following table presents information regarding the
collateral provided for our secured debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
2010
|
|
|
Number of
|
|
|
|
Debt Outstanding
|
|
|
Net Book Value
|
|
|
Aircraft
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Senior Secured Notes
|
|
$
|
3,900,000
|
|
|
$
|
7,400,737
|
|
|
|
174
|
|
ECA Financings
|
|
|
2,777,285
|
|
|
|
5,926,831
|
|
|
|
120
|
|
Bank Debt
|
|
|
1,465,400
|
|
|
|
5,023,767
|
|
|
|
137
|
|
Other Secured Financings
|
|
|
1,436,258
|
|
|
|
2,786,602
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,578,943
|
|
|
$
|
21,137,937
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Notes
On August 20, 2010, we issued $3.9 billion of senior
secured notes, with $1.35 billion maturing in September
2014 and bearing interest of 6.5%, $1.275 billion maturing
in September 2016 and bearing interest of 6.75%, and
$1.275 billion maturing in September 2018 and bearing
interest of 7.125%. The aggregate net proceeds from the
issuances were approximately $3.84 billion after deducting
initial purchaser discounts and commissions, fees and offering
expenses. The notes are secured by a designated pool of
aircraft, initially consisting of 174 aircraft and their related
leases and certain cash collateral. In addition, two of
ILFCs subsidiaries, that either own or hold leases of
aircraft included in the pool securing the notes, have
guaranteed the notes. We can redeem the notes at any time prior
to their maturity, provided we give notification between 30 to
60 days prior to the intended redemption date and
72
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
subject to a penalty of the greater of 1% of the outstanding
principal amount and a make-whole premium. There is
no sinking fund for the notes.
The indenture governing the senior secured notes contains
customary covenants that, among other things, restrict our and
our restricted subsidiaries ability to:
(i) create liens; (ii) sell, transfer
or otherwise dispose of assets; (iii) declare or pay
dividends or acquire or retire shares of our capital stock;
(iv) designate restricted subsidiaries as
non-restricted subsidiaries or designate non-restricted
subsidiaries; (v) make investments in or transfer
assets to non-restricted subsidiaries; and
(vi) consolidate, merge, sell or otherwise dispose
of all, or substantially all, of our assets.
The indenture also provides for customary events of default,
including but not limited to, the failure to pay scheduled
principal and interest payments on the notes, the failure to
comply with covenants and agreements specified in the indenture,
the acceleration of certain other indebtedness resulting from
non-payment of that indebtedness, and certain events of
insolvency. If any event of default occurs, any amount then
outstanding under the senior secured notes may immediately
become due and payable.
We used the proceeds from the issuance of the senior secured
bonds to repay in full our loans from AIG Funding, as discussed
below.
Export
Credit Facilities
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 made under each ECA facility were guaranteed by
various European ECAs. We have collateralized the debt under
each ECA facility 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 December 31, 2010, five loans with an aggregate
principal value of $13.2 million remained outstanding under
the facility and the net book value of the related aircraft was
$1.6 billion. In January 2011, all of the amounts
outstanding under the remaining five loans were repaid in full
and no amounts remain outstanding under the 1999 ECA facility.
In May 2004, we entered into the 2004 ECA facility, which was
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 December 31, 2010, approximately
$2.8 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 0.43% to 4.711%
at December 31, 2010. The net book value of the related
aircraft was $4.3 billion at December 31, 2010.
Our current long-term debt ratings require us to segregate
security deposits, overhaul rentals and rental payments received
for aircraft with loan balances outstanding under the 2004 ECA
facility (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 trustee of the facility. In
addition, we must register the existing individual mortgages on
certain 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 December 31, 2010, we had segregated
security deposits, overhaul rentals
73
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
and rental payments aggregating approximately
$393.7 million related to aircraft funded under the 1999
and 2004 ECA facilities. The segregated amounts will fluctuate
with changes in security deposits, overhaul rentals, rental
payments and debt maturities related to the aircraft funded
under the 2004 ECA facility.
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 no more than 50%, in
order to release liens (including the cross-collateralization
arrangement) on any aircraft financed under the 1999 or 2004 ECA
facilities 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
$10.5 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 $301.6 million at December 31, 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 2004 ECA facility, we would have
to segregate lease payments, overhaul rentals and security
deposits received after such acceleration event occurred
relating to all the aircraft funded under the 1999 ECA facility,
including the aircraft no longer subject to a loan.
Secured
Bank Debt
We have a credit facility, dated October 13, 2006, as
amended, under which the original maximum amount available was
$2.5 billion. On April 16, 2010, we entered into an
amendment to this facility with lenders holding
$2.155 billion of the then $2.5 billion of outstanding
loans under the facility (the Electing Lenders). The
Electing Lenders agreed to, among other things:
|
|
|
|
|
revise certain restrictive covenants included in the credit
agreement;
|
|
|
|
extend the scheduled maturity date of their loans to October
2012. The extended loans, of which approximately
$1.5 billion remained outstanding at December 31,
2010, 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 the loans held by the Electing Lenders.
|
We entered into a second amendment to this credit agreement,
effective December 22, 2010, that amended the definition of
the fixed charge coverage ratio, a restrictive covenant under
the agreement, to add to earnings any impairment charges and
fair value adjustments incurred during the period, to the extent
such impairment charges and fair value adjustments were deducted
in computing earnings for the period. In conjunction with the
amendment, we repaid $689.6 million of the secured loans
and, as of December 31, 2010, we had secured loans of
$1.465 billion outstanding under the facility, all of which
will mature in October 2012.
74
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
The remaining $234.6 million of unsecured loans held by
lenders who are not party to the amendment will mature on their
originally scheduled maturity date in October 2011, with no
increase to the interest rate margin.
The collateralization requirement under the amended facility
provides that the 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
outstanding 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, subject to our right to post cash
collateral for any shortfall. As of December 31, 2010, we
had completed the transfers of all aircraft in an amount
sufficient to meet the Required Collateral Amount. The credit
facility also 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 prohibits us from re-borrowing amounts
repaid under this facility for any reason. Therefore, the
current size of the facility is the $1.7 billion
outstanding under the facility at December 31, 2010. The
credit facility also contains financial and restrictive
covenants that (i) limit our ability to incur
indebtedness, (ii) restrict certain payments, liens
and sales of assets by us, and (iii) require us to
maintain a fixed charge coverage ratio and consolidated tangible
net worth in excess of certain minimum levels.
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 December 31, 2010, the
interest rates on the $82.0 million and $24.0 million
tranches were 3.408% and 5.108%, 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 December 31, 2010, $89.5 million was outstanding
under the two tranches and the net book value of the aircraft
was $137.1 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 December 31, 2010, $46.7 million was
outstanding and the net book value of the aircraft was
$91.2 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
75
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
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
December 31, 2010, $63.3 million of the proceeds
remained restricted. 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%.
Loans
from AIG Funding
We borrowed a total of $3.9 billion from AIG Funding from
March 2009 to December 2009. These loans were scheduled to
mature on September 13, 2013. The funds for the loans were
provided to AIG Funding by the Federal Reserve Bank of
New York (FRBNY) pursuant to the FRBNY Credit
Facility. 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
Facility up to an amount equal to the aggregate outstanding
balance of the loans from AIG Funding.
On August 20, 2010, we repaid all amounts outstanding under
the loans from AIG Funding with the net proceeds from the
issuance of $3.9 billion aggregate principal amount of
senior secured notes and $500 million aggregate principal
amount of senior notes. See Senior Secured
Notes and Unsecured Bonds and Medium-Term
Notes. As a result of our repayment of the loans from
AIG Funding, the FRBNY released their liens on the collateral
securing these loans.
Unsecured
Bonds and Medium-Term Notes
Our unsecured bonds, including our medium-term notes, provide
for a single principal payment at the maturity of the respective
note and cannot be redeemed prior to maturity. At
December 31, 2010 and 2009 we had floating rate notes
aggregating $850.0 million and $1.4 billion,
respectively, and the remainder of our unsecured notes were at
fixed rates. To the extent deemed appropriate we enter into
derivative transactions to manage our effective borrowing rates
with respect to floating rate notes.
Automatic Shelf Registration: We have an
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.
Pursuant to our automatic shelf
registration: (i) on August 20,
2010, we issued $500 million of 8.875% notes due 2017
and (ii) on December 7, 2010, we issued
$1.0 billion of 8.25% notes due 2020. At
December 31, 2010, we also had $10.0 billion of public
bonds and medium-term notes outstanding, with interest rates
ranging from 0.61% to 7.95%, which we had issued in prior
periods under previous registration statements.
Euro Medium-Term Note Programme: We have a
$7.0 billion Euro Medium-Term Note Programme under which we
had approximately $1.2 billion and $1.9 billion of
Euro denominated notes outstanding at December 31, 2010 and
2009 (1.0 billion in 2010 and 1.6 billion
in 2009). The notes mature on August 15, 2011, and bear
interest based on Euribor with a spread of 0.375%. The Programme
is perpetual. As a bond issue matures, the principal amount of
that bond becomes available for new issuances under the
Programme. We have eliminated the currency exposure arising from
the notes by hedging the notes into U.S. dollars and fixing
the interest rates at a range of 5.355% to 5.367%. We translate
the debt into U.S. dollars using current exchange rates
prevailing at the balance sheet date. The foreign exchange
adjustment for the foreign currency denominated notes was
$165.4 million and $391.1 million at December 31,
2010 and 2009, respectively.
76
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
A rollforward for the year ended December 31, 2010, of the
foreign exchange adjustment for the foreign currency adjustment
related to foreign currency denominated notes is presented below:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency adjustment related to foreign currency
denominated debt at December 31, 2009
|
|
$
|
391,100
|
|
Foreign currency adjustment of non-US$ denominated debt
|
|
|
(200,320
|
)
|
Repayment of debt principal from cash receipts under derivative
contracts at the maturity of the debt and the derivative contract
|
|
|
(25,380
|
)
|
|
|
|
|
|
Foreign currency adjustment related to foreign currency
denominated debt at December 31, 2010
|
|
$
|
165,400
|
|
|
|
|
|
|
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 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.
Because the registration statement for the exchange offer had
not been declared effective by the SEC by January 26, 2011,
as required under the registration rights agreement, the annual
interest rate on the affected notes increased by 0.25% per year
for 90 days, commencing on that date. If (i) we
are unable to consummate the exchange offer by April 26,
2011, or (ii) if applicable, a shelf registration
statement has not been declared effective or ceases to be
effective during the required effectiveness period, the annual
interest rate on such notes will increase by an additional 0.25%
per year to the maximum additional rate of 0.50% per year. The
applicable interest rate will revert to the original level after
the exchange offer is consummated.
The indentures governing the unsecured bonds and medium-term
notes contain 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.
The indenture also provides for customary events of default,
including but not limited to, the failure to pay scheduled
principal and interest payments on the notes, the failure to
comply with covenants and agreements specified in the indenture,
the acceleration of certain other indebtedness resulting from
non-payment of that indebtedness, and certain events of
insolvency. If any event of default occurs, any amount then
outstanding under the senior notes may immediately become due
and payable.
Unsecured
Bank Debt
Revolving Credit Facilities: In October 2010,
using cash on hand, we repaid and terminated our
$2.0 billion unsecured revolving credit facility, scheduled
to expire on October 14, 2010. This floating rate
obligation had an interest rate of 0.91% at the time of
repayment.
As of December 31, 2010, $234.6 million of unsecured
loans were outstanding under our credit agreement dated as of
October 13, 2006. These loans are held by lenders not party
to the April 2010 amendment of such facility
77
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note G
|
Debt
Financing (Continued)
|
and remain unsecured and mature in October 2011 on the original
maturity date for this credit facility. Effective as of
December 22, 2010, we amended such credit agreement to
revise the definition of fixed charge coverage ratio to add to
earnings impairment charges and fair value adjustments incurred
during such period to the extent they were deducted from
earnings. In conjunction with the amendment, we repaid
$110.4 million of the unsecured loans and, as of
December 31, 2010, $234.6 million of the loans
remained outstanding. See Secured Bank Debt
above.
On January 31, 2011, we entered into a new
$2.0 billion unsecured three-year revolving credit facility
with a group of 11 banks that will expire on January 31,
2014. This revolving credit facility provides for interest rates
based on either a base rate or LIBOR plus an applicable margin
determined by a ratings-based pricing grid. The credit agreement
contains customary events of default and restrictive financial
covenants that require us to maintain a minimum fixed charge
coverage ratio, a minimum consolidated tangible net worth and a
maximum ratio of consolidated debt to consolidated tangible net
worth. As of March 4, 2011, no amounts were outstanding
under this revolving facility.
Term Loans: From time to time, we enter into
funded bank financing arrangements. During 2010, we repaid in
full all such outstanding term loans, and such payments
aggregated $485 million.
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 had a call option date of
December 21, 2010, and the $400 million tranche has a
call option date of December 21, 2015. We did not exercise
the call option at December 21, 2010 and the interest rate
on the $600 million tranche changed from a fixed interest
rate of 5.90% to a floating rate with an initial credit spread
of 1.55% plus the highest of (i) 3 month LIBOR;
(ii)
10-year
constant maturity treasury; and
(iii) 30-year
constant maturity treasury. The interest will reset quarterly.
The $400 million tranche has a fixed interest rate of 6.25%
until the 2015 call option date, and if we do not exercise the
call option, the interest rate will change to a floating rate,
reset quarterly, based on the initial credit spread of 1.80%
plus the highest of (i) 3 month LIBOR;
(ii) 10-year
constant maturity treasury; and
(iii) 30-year
constant maturity treasury. If we choose to redeem the
$600 million tranche, we must pay 100% of the principal
amount of the bonds being redeemed, plus any accrued and unpaid
interest to the redemption date. If we choose to redeem only a
portion of the outstanding bonds, at least $50 million
principal amount of the bonds must remain outstanding.
Existing
Commitments
Maturities of debt financing (excluding deferred debt discount)
at December 31, 2010 are as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
$
|
5,089,594
|
|
2012
|
|
|
5,479,844
|
|
2013
|
|
|
3,985,804
|
|
2014
|
|
|
2,850,714
|
|
2015
|
|
|
2,356,428
|
|
Thereafter
|
|
|
7,862,002
|
|
|
|
|
|
|
|
|
$
|
27,624,386
|
|
|
|
|
|
|
Other
Under the most restrictive provisions of our debt agreements,
consolidated retained earnings at December 31, 2010, in the
amount of $1.9 billion are unrestricted as to payment of
dividends based on consolidated net tangible worth requirements.
78
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note H
|
Security
Deposits on Aircraft, Overhaul Rentals and Other Customer
Deposits
|
As of December 31, 2010 and 2009, Security deposits,
overhaul rentals, and other customer deposits were comprised of:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Security deposits paid by lessees
|
|
$
|
1,081,021
|
|
|
$
|
1,069,721
|
|
Overhaul rentals
|
|
|
529,834
|
|
|
|
390,306
|
|
Other customer deposits
|
|
|
9,929
|
|
|
|
9,929
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,620,784
|
|
|
$
|
1,469,956
|
|
|
|
|
|
|
|
|
|
|
Security deposits paid by lessees are returned to the lessees at
the end of the lease in accordance with the lease terms.
Overhaul rentals reflect overhaul rentals estimated to be
reimbursed to the lessee.
|
|
Note I
|
Shareholders
Equity
|
Market
Auction Preferred Stock
The Market Auction Preferred Stock (MAPS) have a
liquidation value of $100,000 per share and are not convertible.
The dividend rate, other than the initial rate, for each
dividend period for each series is reset approximately every
seven weeks (49 days) on the basis of orders placed in an
auction, provided such auctions are able to occur. At the
present time, there is no ability to conduct such auctions.
Therefore, the MAPS certificates of determination dictate that a
maximum applicable rate (as calculated on each
auction date pursuant to the certificates of determination) be
paid on the MAPS. At December 31, 2010, the dividend rate
for Series A was 0.53% and for Series B MAPS was 0.61%.
Paid-in
Capital
We recorded approximately $2.8 million in 2010,
$3.3 million in 2009, and $6.8 million in 2008 in
Paid-in capital for debt issue cost, compensation and other
expenses paid by AIG on our behalf, which we were not required
to pay.
Accumulated
Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income consists of
changes in fair value of derivative instruments that qualify as
cash flow hedges and unrealized gains and losses on marketable
securities classified as
available-for-sale.
The fair value of derivatives were determined using fair values
obtained from AIG. The fair value of marketable securities were
determined using quoted market prices.
At December 31, 2010 and 2009, our accumulated other
comprehensive (loss) income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Cumulative unrealized (loss) gain related to cash flow hedges,
net of tax of $32,026 (2010) and $74,566 (2009)
|
|
$
|
(59,476
|
)
|
|
$
|
(138,482
|
)
|
Cumulative unrealized gain related to securities available for
sale, net of tax of $287 (2010) and $149 (2009)
|
|
|
532
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive (loss) income
|
|
$
|
(58,944
|
)
|
|
$
|
(138,206
|
)
|
|
|
|
|
|
|
|
|
|
79
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Minimum future rentals on non-cancelable operating leases and
subleases of flight equipment which has been delivered as of
December 31, 2010 are shown below.
|
|
|
|
|
Year Ended
|
|
(Dollars in thousands)
|
|
2011
|
|
$
|
4,170,939
|
|
2012
|
|
|
3,590,518
|
|
2013
|
|
|
2,930,667
|
|
2014
|
|
|
2,247,008
|
|
2015
|
|
|
1,647,128
|
|
Thereafter
|
|
|
2,517,784
|
|
|
|
|
|
|
|
|
$
|
17,104,044
|
|
|
|
|
|
|
Additional rental revenue we earned based on the lessees
usage aggregated $328.8 million in 2010,
$342.9 million in 2009 and $352.2 million in 2008.
Flight equipment is leased, under operating leases, with
remaining terms ranging from one to 15 years.
Unamortized initial direct cost of $89.3 million and
$85.3 million at December 31, 2010 and 2009,
respectively, is included in Lease receivables and other
assets on our Consolidated Balance Sheets.
The (benefit) provision for income taxes is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal(a)
|
|
$
|
41,357
|
|
|
$
|
110,579
|
|
|
$
|
14,527
|
|
State
|
|
|
677
|
|
|
|
1,467
|
|
|
|
(557
|
)
|
Foreign
|
|
|
1,459
|
|
|
|
1,262
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,493
|
|
|
|
113,308
|
|
|
|
15,180
|
|
Deferred(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(229,262
|
)
|
|
|
379,813
|
|
|
|
370,968
|
|
State(c)
|
|
|
(22,341
|
)
|
|
|
7,417
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(251,603
|
)
|
|
|
387,230
|
|
|
|
376,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(208,110
|
)
|
|
$
|
500,538
|
|
|
$
|
391,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Including U.S. tax on foreign
income.
|
|
(b)
|
|
Deferred taxes were also provided
(charged) to other comprehensive (loss) income of
$(42.7) million, $(16.1) million and
$33.3 million for the years ended December 31, 2010,
2009, and 2008, respectively.
|
|
(c)
|
|
Includes a benefit of
$20.7 million in 2010, a charge of $3.7 million in
2009 and a charge of $1.1 million in 2008 for revaluation
of state deferred taxes as a result of a change in our
California apportionment factor.
|
80
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note K
|
Income
Taxes (Continued)
|
The net deferred tax liability consists of the following
deferred tax liabilities (assets):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Accelerated depreciation on flight equipment
|
|
$
|
5,215,054
|
|
|
$
|
5,394,198
|
|
Straight line rents
|
|
|
17,472
|
|
|
|
37,586
|
|
Derivatives
|
|
|
2,507
|
|
|
|
14,381
|
|
Other
|
|
|
911
|
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
$
|
5,235,944
|
|
|
$
|
5,448,135
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Excess of state income taxes not currently deductible
|
|
$
|
(9,625
|
)
|
|
$
|
(17,668
|
)
|
Estimated reimbursements of overhaul rentals
|
|
|
(195,548
|
)
|
|
|
(137,997
|
)
|
Capitalized overhauls
|
|
|
(71,610
|
)
|
|
|
(64,628
|
)
|
Rent received in advance
|
|
|
(94,890
|
)
|
|
|
(92,129
|
)
|
Other comprehensive income
|
|
|
(31,739
|
)
|
|
|
(74,419
|
)
|
Accruals and reserves
|
|
|
(150,726
|
)
|
|
|
(85,008
|
)
|
Net operating loss carry forward(a)
|
|
|
(14,353
|
)
|
|
|
(58,899
|
)
|
Losses of VIEs
|
|
|
|
|
|
|
(29,281
|
)
|
Other
|
|
|
(3,514
|
)
|
|
|
(6,548
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets(b)
|
|
$
|
(572,005
|
)
|
|
$
|
(566,577
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liability(c)
|
|
$
|
4,663,939
|
|
|
$
|
4,881,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Represents operating losses
generated from tax years 2007 and 2008. Deferred tax assets
related to the losses generated are reclassified from current to
deferred tax liabilities due to uncertainties with regard to the
timing of their future utilization in the consolidated tax
return of AIG. Deferred taxes related to the losses will be
reclassified to current in future years when we are notified by
AIG of amounts utilized in future tax years or through a carry
back to prior tax years.
|
|
(b)
|
|
In making our assessment of the
realization of deferred tax assets including net operating loss
carry forwards, we considered all available evidence, including
(i) current and projected financial reporting
results; (ii) the carry forward periods for all
taxable losses; (iii) the projected amount, nature
and timing of the realization of deferred tax liabilities;
(iv) implications of our tax sharing agreement with
AIG; and (v) tax planning strategies that would be
implemented, if necessary, to accelerate taxable amounts.
|
|
(c)
|
|
Beginning in 2002, ILFCs
Australian subsidiaries have owned aircraft and claimed tax
depreciation deduction for Australian tax purposes. Australian
deferred taxes have not been included in the parents U.S.
financial statement due to accumulated operating loss carried
forward recorded by the Australian subsidiaries. At
December 31, 2010 and 2009, the Australian subsidiaries
have aggregate operating loss carried forward of
$308 million and $311 million, respectively, and
deferred tax liabilities of $279 million and
$279 million, respectively. Any potential Australian tax
gains resulting from disposition of the aircraft will be fully
absorbed by the carried forward losses. Because the company does
not expect to generate additional revenue to utilize the excess
operating loss, a valuation allowance is recorded against the
excess carried forward loss. As a result, the ownership and
depreciation of aircraft by the Australian subsidiaries has no
impact to the companys net deferred tax liability.
|
81
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note K
|
Income
Taxes (Continued)
|
A reconciliation of the computed expected total provision for
income taxes to the amount recorded is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Computed expected provision at 35%
|
|
$
|
(207,154
|
)
|
|
$
|
488,659
|
|
|
$
|
383,152
|
|
State income tax, net of Federal
|
|
|
(14,081
|
)
|
|
|
5,774
|
|
|
|
3,179
|
|
Foreign Taxes
|
|
|
133
|
|
|
|
10
|
|
|
|
97
|
|
IRS audit adjustments(a)
|
|
|
8,656
|
|
|
|
2,185
|
|
|
|
2,863
|
|
Other(b)
|
|
|
4,336
|
|
|
|
3,910
|
|
|
|
2,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(208,110
|
)
|
|
$
|
500,538
|
|
|
$
|
391,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We are periodically advised of
certain IRS and other adjustments identified in the U.S.
Consolidated AIG tax return which are attributable to our
operations. Under our tax sharing arrangement, we provide a
charge or credit for the effect of the adjustments and the
related interest in the period we are advised of such
adjustments and interest.
|
|
(b)
|
|
Consists principally of permanent
items related to current and prior year tax returns.
|
In 2002 and 2003, we participated in certain tax planning
activities with our parent, AIG and related entities, which
provided certain tax and other benefits to the AIG consolidated
group. As a result of our participation in these activities, AIG
shared a portion of the tax benefits of these activities
attributable to us which aggregated $245 million. We repaid
$160 million in 2007 and the remaining $85 million was
paid during 2010 and is classified under Tax benefit sharing
payable to AIG on the Consolidated Statement of Cash Flows.
In October 2004, Congress passed the American Jobs Creation Act
of 2004, repealing the corporate export tax benefits under the
ETI, after the World Trade Organization (WTO) ruled
the export subsidies were illegal. Under the act, ETI export tax
benefits for corporations would be phased out in 2005 and 2006
for certain transactions. On January 26, 2006, the WTO
ruled the American Jobs Creation Act fails to fully implement
the recommendations from the Dispute Settlement Body as long as
it includes transitional and grandfathering measures. A memo
released by the Internal Revenue Service (IRS) in
January 2007 indicates that some contracts may be grandfathered.
However, the memo notes that it cannot be relied upon and there
has been no other published announcement by the IRS as to
whether benefits for some contracts may continue after 2006. We
believe that the FSC and ETI benefits will be an available
benefit in our 2007 through 2010 U.S. Consolidated AIG tax
returns. However, we have not concluded that the likelihood that
the benefit will be realized is more likely than not. As such,
we have increased our gross unrecognized tax benefit liability
by the amount of the FSC and ETI benefits for those years. If
these tax benefits, which aggregate $207.0 million, are
ultimately recognized in our consolidated financial statements,
our annual effective tax rate would decrease. We estimate
additional unrecognized tax benefits related to FSC and ETI
benefits during 2011 of approximately $50 million to
$60 million.
82
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note K
|
Income
Taxes (Continued)
|
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1, 2008
|
|
$
|
63,776
|
|
Additions based on tax positions related to 2008(a)
|
|
|
50,980
|
|
Additions for tax positions of prior years(b)
|
|
|
6,726
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
121,482
|
|
|
|
|
|
|
Additions based on tax positions related to 2009(a)
|
|
|
50,823
|
|
Additions for tax positions of prior years(b)
|
|
|
1,121
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Settlements(c)
|
|
|
(7,602
|
)
|
|
|
|
|
|
Balance at December 31, 2009(d)
|
|
|
165,824
|
|
|
|
|
|
|
Additions based on tax positions related to 2010(a)
|
|
|
53,584
|
|
Additions for tax positions of prior years(b)
|
|
|
5,944
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010(d)
|
|
$
|
225,352
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Consists principally of FSC and ETI
benefits.
|
|
(b)
|
|
Items attributable to IRS
adjustments.
|
|
(c)
|
|
Amounts paid to AIG related to the
settlement of prior year audit adjustments for the years 1991 to
1999. In addition, we paid $4.6 million in interest during
the year ended December 31, 2009. We did not pay any
interest in 2008 or 2010.
|
|
(d)
|
|
$53.6 million and
$8.0 million is recorded in current taxes at December 2010
and 2009, respectively, and $121.1 million and
$107.1 million is recorded in deferred taxes at
December 31, 2010 and 2009, respectively. In addition,
$50.7 million is recorded in Accrued interest and other
payables at December 31, 2009 and 2010, respectively.
|
Interest related to unrecognized tax benefits are recognized in
income tax expense. We recognized $5.0 million,
$2.2 million and $2.9 million of interest in the
Consolidated Statement of Operations for the years ended
December 31, 2010, 2009, and 2008, respectively. At
December 31, 2010, 2009, and 2008, we had included in
current taxes payable $13.2 million, $8.2 million and
$10.6 million, respectively, for the payment of interest
(net of the federal benefit).
The balance of unrecognized tax benefits at December 31,
2010, included proposed tax adjustments for the years 2000 to
2007, which have been agreed with, but not yet finalized by, the
relevant tax authorities. AIG continually evaluates proposed
audit adjustments by taxing authorities. The tax return years
2000 through 2007 remain subject to examination by tax
authorities in jurisdictions where we are included in AIGs
tax returns (principally in the U.S.).
The Current income taxes recorded on the Consolidated balance
sheet represents amounts due to/from AIG under our tax sharing
arrangements for US Federal and state taxes. Under the tax
sharing arrangements, AIG reimburses us for any tax benefit
arising out of the use by AIG of any tax benefits generated by
us including net operating losses to the extent used in the
consolidated tax returns. As a result of the consolidated
taxable losses of AIG, AIG informed us that certain benefits
generated by us would not be reimbursed until utilized by AIG,
or upon expiration of the benefits. As such, the 2008 provision
for current income tax was charged for $75.4 million,
including (i) Net operating loss carry forwards of
$167.3 million; (ii) reserve for uncertain tax
positions of $(107.1) million; and (iii) audit
adjustments relating to 2006 of $15.2 million. A
corresponding credit was recorded
83
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note K
|
Income
Taxes (Continued)
|
in the provision for deferred taxes. In 2009, the provision for
current income tax was charged $67.2 million, including
(i) $1.3 million for adjustment and utilization
of prior year net operating loss;
(ii) $15.2 million for audit adjustments
related to 2006; and (iii) reserve for uncertain tax
positions of $50.7 million. In 2010, the current tax
payable was reduced by the utilization of $44.5 million of
net operating loss carryforwards.
|
|
Note L
|
Other
Information
|
Concentration
of Credit Risk
We lease and sell aircraft to airlines and others throughout the
world. The lease and notes receivables are from entities located
throughout the world. We generally obtain deposits on leases and
obtain collateral in flight equipment on notes receivable. No
single customer accounted for more than 10% of total revenues in
2010, 2009 or 2008.
Our 2010 revenues from rentals of flight equipment include
$36.5 million (0.77% of total revenue) from lessees who
have filed for bankruptcy protection.
Segment
Information
We operate within one industry: the leasing, sales and
management of flight equipment.
Geographical
Concentration
Revenues from rentals of flight equipment to foreign airlines
were $4.4 billion in 2010, $4.6 billion in 2009, and
$4.4 billion in 2008, comprising 93.6%, 92.9%, and 93.0%,
respectively, of total revenues from rentals of flight
equipment. The following table sets forth the dollar amount and
percentage of total revenues from rentals of flight equipment
attributable to the indicated geographic areas based on each
airlines principal place of business for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
|
Europe
|
|
$
|
2,103,058
|
|
|
|
44.5
|
%
|
|
$
|
2,195,516
|
(a)
|
|
|
44.6
|
%
|
|
$
|
2,110,239
|
|
|
|
45.1
|
%
|
Asia and the Pacific
|
|
|
1,455,873
|
|
|
|
30.8
|
|
|
|
1,503,241
|
|
|
|
30.5
|
|
|
|
1,372,454
|
|
|
|
29.3
|
|
The Middle East and Africa
|
|
|
375,496
|
|
|
|
7.9
|
|
|
|
412,687
|
(a)
|
|
|
8.4
|
|
|
|
414,493
|
|
|
|
8.9
|
|
U.S. and Canada
|
|
|
206,396
|
|
|
|
4.4
|
|
|
|
228,126
|
|
|
|
4.6
|
|
|
|
254,603
|
|
|
|
5.4
|
|
Central and South America and Mexico
|
|
|
585,679
|
|
|
|
12.4
|
|
|
|
588,683
|
|
|
|
11.9
|
|
|
|
527,067
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,726,502
|
(b)
|
|
|
100.0
|
%
|
|
$
|
4,928,253
|
(b)
|
|
|
100.0
|
%
|
|
$
|
4,678,856
|
(b)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Revenues from rentals of flight
equipment attributable to two countries have been reclassified
from the Middle East and Africa to Europe to reflect the new
geographical boundaries of the European Union.
|
(b)
|
|
Revenues from rentals of flight
equipment have been reduced by $478.6 million (2010),
$347.0 million (2009) and $264.6 million (2008),
which was previously recorded as Provision for overhauls in
expenses.
|
Lease revenues from the rental of flight equipment have been
reduced by payments received by our customers from the aircraft
and engine manufacturers.
84
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note L
|
Other
Information (Continued)
|
The following table sets forth revenue attributable to
individual countries representing at least 10% of total revenue
in any year based on each airlines principal place of
business for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
(Dollars in thousands)
|
|
China
|
|
$
|
815,683
|
|
|
|
17.3
|
%
|
|
$
|
879,073
|
|
|
|
18.3
|
%
|
|
$
|
819,371
|
|
|
|
17.5
|
%
|
France
|
|
|
516,899
|
|
|
|
10.9
|
|
|
|
526,283
|
|
|
|
10.9
|
|
|
|
504,370
|
|
|
|
10.8
|
|
Currency
Risk
We attempt to minimize our currency and exchange risks by
negotiating our aircraft purchase agreements and most of our
aircraft leases in U.S. dollars. Some of our leases,
however, are negotiated in Euros to meet the needs of a number
of airlines. We have hedged part of future lease payments
receivable through 2010. We bear risk of receiving less
U.S. dollar rental revenue on lease payments not hedged and
incurring future currency losses on cash held in Euros if the
value of the Euro deteriorates against the U.S. dollar.
Foreign currency transaction gains (losses) in the amounts of
$(2.3) million, $5.5 million and $(3.7) million
were recognized for the periods ended December 31, 2010,
2009, and 2008, respectively, and are included in Interest
and other in our Consolidated Statements of Operations.
|
|
Note M
|
Employee
Benefit Plans
|
Our employees participate in various benefit plans sponsored by
AIG, including a noncontributory qualified defined benefit
retirement plan, a voluntary savings plan (401(k) plan) and
various stock based and other compensation plans.
Pension
Plans
Pension plan and 401(k) plan expenses allocated to us by AIG
were $23.8 million for 2010, including a $20.2 million
out of period adjustment, $3.0 million for 2009 and
$1.6 million for 2008, and are included in Selling, general
and administrative in our Consolidated Statements of Operations.
See Note T Out of Period Adjustment.
AIGs U.S. benefit plans do not separately identify
projected benefit obligations and plan assets attributable to
employees of participating affiliates. AIGs projected
benefit obligations exceeded the plan assets at
December 31, 2010 by $438.7 million.
Stock-Based
and Other Compensation Plans
At December 31, 2010, our employees participated in the
following stock-based and other compensation plans:
(i) AIG 2007 Stock Incentive Plan;
(ii) Starr International Company, Inc. Deferred
Compensation Profit Participation Plans; (iii) AIG
2005-2006
Deferred Compensation Profit Participation Plan;
(iv) AIG Partners Plan; (v) ILFC
Deferred Compensation Plan; (vi) ILFC Long-Term
Incentive Plan; and (vii) stock salary awards and
restricted stock units, which are liability awards issued
pursuant to executive compensation regulations applicable to AIG
under the Troubled Asset Relief Program (TARP).
We recorded compensation expenses of $12.8 million,
$14.0 million and $6.0 million for our participation
in AIGs share-based payment and liability programs and
$6.4 million, $12.6 million and $7.4 million for
our deferred compensation and long-term incentive plans for the
years ended December 31, 2010, 2009, and 2008,
respectively. The impact of all plans, both individually and in
the aggregate, is immaterial to the consolidated financial
statements.
85
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note N
|
Commitments
and Contingencies
|
Aircraft
Orders
At December 31, 2010, we had committed to purchase 115 new
aircraft, scheduled for delivery through 2019 at an estimated
aggregate purchase price (including adjustment for anticipated
inflation) of approximately $13.5 billion. All of these
purchase commitments to purchase new aircraft are based upon
purchase agreements with each of the Boeing Company
(Boeing) and Airbus.
The Boeing aircraft (models 737 and 787), and the Airbus
aircraft (models A319, A320, A321, A350XWB and A380) are being
purchased pursuant to the terms of purchase agreements executed
by us and Boeing or Airbus. These agreements establish the
pricing formulas (which include certain price adjustments based
upon inflation and other factors) and various other terms with
respect to the purchase of aircraft. Under certain
circumstances, we have the right to alter the mix of aircraft
type ultimately acquired. As of December 31, 2010, we had
made non-refundable deposits on these purchase commitments of
approximately $118.6 million and $23.1 million with
Boeing and Airbus, respectively.
In the first quarter of 2011, we signed a memorandum of
understanding to purchase 75 A320neos and 25 A321neos from
Airbus, which will replace our previous A380 commitments, and a
purchase agreement for 33
737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019.
Management anticipates that a portion of the aggregate purchase
price for the acquisition of aircraft will be funded by
incurring additional debt. The exact amount of the indebtedness
to be incurred will depend upon the actual purchase price of the
aircraft, which can vary due to a number of factors, including
inflation, and the percentage of the purchase price of the
aircraft which must be financed.
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 guaranteed value. At
December 31, 2010, the maximum aggregate potential
commitment that we were obligated to pay under such guarantees,
without any offsets for the projected values of the aircraft,
was approximately $530.0 million.
Aircraft Loan Guarantees: We guarantee two
loans collateralized by aircraft to financial institutions. 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
December 31, 2010, the guaranteed value, without any offset
for the projected value of the aircraft, was approximately
$23.0 million.
Management regularly reviews the underlying values of the
aircraft collateral to determine our exposure under these
guarantees. We currently do not anticipate that we will be
required to perform under such guarantees based upon the
underlying values of the aircraft collateral. Unamortized
balance of guarantees of $10.0 million (2010) and
$10.9 million (2009) is included in Accrued interest
and other payables on our Consolidated Balance Sheets.
Leases
We have operating leases for office space and office equipment
extending through 2015. Rent expense was $11.3 million in
2010, $11.0 million in 2009 and $10.0 million in 2008.
The leases provide for step rentals over the term and those
rentals are considered in the evaluation of recording rent
expense on a straight-line basis over the term of the lease.
Tenant improvement allowances received from lessors are
capitalized and amortized in selling,
86
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note N
|
Commitments
and Contingencies (Continued)
|
general and administrative expenses as a reduction of rent
expense. Commitments for minimum rentals under the noncancelable
leases at December 31, 2010, are as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2011
|
|
$
|
11,973
|
|
2012
|
|
|
12,453
|
|
2013
|
|
|
12,951
|
|
2014
|
|
|
13,362
|
|
2015
|
|
|
9,063
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total(a)
|
|
$
|
59,802
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Minimum rentals have not been
reduced by minimum sublease rentals of $6.5 million in the
future under non-cancelable subleases.
|
Contingencies
Legal
Contingencies
|
|
|
|
|
Flash Airlines, Yemen Airways-Yemenia and Airblue
Limited: We are named in lawsuits in connection
with the 2004 crash of our Boeing
737-300
aircraft on lease to Flash Airlines, an Egyptian carrier; the
2009 crash of our Airbus A310-300 aircraft on lease to Yemen
Airways-Yemenia, a Yemeni carrier; and the 2010 crash of our
Airbus A320-200 aircraft on lease to Airblue Limited, a
Pakistani carrier. These lawsuits were filed by the families of
victims on the flights and seek unspecified damages for wrongful
death, costs, and fees. The Flash Airlines litigation originally
commenced in May 2004 in California, but all
U.S. proceedings were dismissed in favor of proceedings in
France where claims are pending before the Tribunal de Grande
Instance civil courts in Bobigny and Paris. As of March 4,
2011, the parties are engaged in settlement negotiations. We
believe that we have substantial defenses to this action and
available liability insurance is adequate to cover our defense
costs and any potential liability. The Yemen Airways litigation
was filed in January 2011 in California Superior Court in Los
Angeles County. We have been served with the complaint and the
litigation is in its incipient stages. While plaintiffs have not
specified any amount of damages, we believe that we are
adequately covered by available liability insurance and that we
have substantial defenses to this action. The Airblue Limited
litigation commenced in Cook County, Illinois in September 2010.
The case was removed to the U.S. district court for the
Northern District of Illinois and plaintiffs voluntarily
dismissed their claims without prejudice. We do not believe that
the outcome of any of these lawsuits will have a material effect
on our consolidated financial condition, 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 are currently engaged in settlement negotiations and
at December 31, 2010, we had accrued the proposed
settlement amount in our consolidated financial statements. We
do not expect any settlement payment to be material to our
consolidated financial position, results of operations or cash
flows.
|
|
|
|
Krasnoyarsk Airlines: We leased a
757-200ER
aircraft to a Russian airline, KrasAir, which became the subject
of a Russian bankruptcy-like proceeding. The aircraft was
detained by the Russian customs authorities on the basis of
certain alleged violations of the Russian customs code by
KrasAir. While we
|
87
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note N
|
Commitments
and Contingencies (Continued)
|
prevailed in court proceedings, Russian custom authorities would
not provide relevant documents to permit the aircraft to be
removed from Russia. Therefore, we took possession of the
engines only, and recorded impairment charges in the amount of
$20.8 million for the year ended December 31, 2010, to
reduce the value of the aircraft to the fair value of the
engines. We do not intend to pursue the return of this aircraft
further.
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.
|
|
Note O
|
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, to being the sole
shareholder. Also see Note G 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 we
therefore consolidated these entities into our consolidated
financial statements. Because we did not have legal or
operational control over, did not own the assets of, and were
not directly obligated for the liabilities of these entities, we
presented the assets and liabilities separately on our
Consolidated Balance Sheets. Assets in the amount of
$79.7 million and liabilities in the amount of
$6.5 million were included in our 2009 Consolidated Balance
Sheet and net expenses in the amounts of $7.2 million and
$2.3 million were included in our Consolidated Statements
of Operations for the years ended December 31, 2009 and
2008, respectively, for these entities.
On January 1, 2010, we adopted a new 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.
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 notes receivable of
$51.7 million and guarantee liabilities of
$3.0 million, and we charged our beginning retained
earnings by $15.9 million, net of tax, on January 1,
2010, related to our involvement with these entities. During the
year ended December 31, 2010, events and circumstances
resulted in write-downs of the senior secured notes aggregating
$13.9 million. These write-downs are included in Selling,
general and administrative in our 2010 Consolidated Statement of
Operations. We have a credit facility with these entities to
provide financing up to approximately $13.5 million, of
which approximately $6.3 million was borrowed at
December 31, 2010. The maximum exposure to loss for these
entities is $23.0 million, which is the carrying value of
the senior secured notes and the credit facility at
December 31, 2010.
During 2008, we refinanced a loan secured by a pool of aircraft.
We were not the primary beneficiary of the entity owning the
aircraft, as we were not entitled to receive a majority of the
expected losses or expected residual
88
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note O
|
Variable
Interest Entities (Continued)
|
returns from the entity. In the fourth quarter of 2008, we
foreclosed on our mortgage on the aircraft, and, as such, we
terminated our involvement with the VIE. In conjunction with the
termination of our involvement, we recorded a loss in the amount
of $28.5 million.
Non-Recourse
Financing Structures
We 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 $137.1 million at December 31,
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.
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 $91.2 million at December 31, 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 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 consolidated
financial statements. See Note G Debt
Financing 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 loans which serve as equity.
We control and manage all aspects of these entities, and
guarantee the activities of the entities and they are therefore
consolidated into our consolidated financial statements.
89
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note P
|
Fair
Value Measurements
|
Fair
Value Measurements on a Recurring Basis
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.
Financial instruments with quoted prices in active markets
generally have more pricing observability and less judgment is
used in measuring fair value. Conversely, financial instruments
traded in
other-than-active
markets or that do not have quoted prices have less
observability and are measured at fair value using valuation
models or other pricing techniques that require more judgment.
Pricing observability is affected by a number of factors,
including the type of financial instrument, whether the
financial instrument is new to the market and not yet
established, the characteristics specific to the transaction and
general market conditions. We measure the fair value of
derivative assets and liabilities and marketable securities on a
recurring basis.
Derivative
Contracts
We enter into derivatives to hedge our risk exposure to currency
fluctuations and interest rate fluctuations related to our debt.
(See Note Q Derivative Financial
Instruments.) Our derivatives are not traded on an exchange
and are inherently more difficult to value. AIG provides us the
recurring valuations of our derivative instruments. AIG has
established and documented a process for determining fair
values. AIGs valuation model includes a variety of
observable inputs, including contractual terms, interest rates
curves, foreign exchange rates, yield curves, credit curves,
measure of volatility, and correlations of such inputs.
Valuation adjustments may be made in the determination of fair
value. These adjustments include amounts to reflect counterparty
credit quality and liquidity risk, and are as follows:
|
|
|
|
|
Credit Valuation Adjustment
(CVA): The CVA adjusts the valuation
of derivatives to account for nonperformance risk of our
counterparty with respect to all net derivative assets positions.
|
The CVA also accounts for our own credit risk, in the fair value
measurement of all net derivative liabilities positions, when
appropriate. The CVA is accounted for as a decrease to the net
derivative position with the corresponding increase or decrease
reflected in OCI for derivatives designated as cash flow hedges.
|
|
|
|
|
Market Valuation Adjustment
(MVA): The MVA adjusts the valuation
of derivatives to reflect the fact that we are an
end-user of derivative products. As such the
valuation is adjusted to take into account the bid-offer spread
(the liquidity risk), as we are not a dealer of derivative
products. The MVA is accounted for as a decrease to the net
derivative position with the corresponding increase or decrease
reflected in OCI for derivatives designated as cash flow hedges.
|
The CVA and the MVA are included in the fair value measurement
of our derivative instrument portfolio at December 31, 2010
and 2009. The inclusion of the CVA and the MVA resulted in
incremental reductions of the fair value of derivative assets of
$0.8 million and $24.2 million as of December 31,
2010 and 2009, respectively. The majority of the amount recorded
is related to the CVA. The counterparty of all our foreign
currency swaps and interest rate swaps is AIGFP, a wholly-owned
subsidiary of AIG with an express guarantee from AIG.
Marketable
Securities
Our marketable securities are included in our Lease receivables
and other assets and consist of an investment in common stock of
an airline and AIG common stock held in connection with our
deferred compensation program. We value these marketable
securities using quoted market prices. The marketable securities
are immaterial to our financial position and, therefore, are not
separately disclosed.
90
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note P
|
Fair
Value Measurements (Continued)
|
Fair
Value Measurements on a Non-Recurring Basis
We also measure the fair value of certain assets and liabilities
on a non-recurring basis, when GAAP requires the application of
fair value, including events or changes in circumstances that
indicate that the carrying amounts of assets may not be
recoverable. Assets subject to these measurements include
aircraft. Liabilities include asset value guarantees, loan
guarantees and put options, all related to aircraft
(AVGs). We principally use the income approach to
measure the fair value of these assets and liabilities when
appropriate, as described below:
|
|
|
|
|
Aircraft: We record aircraft at fair value
when we determine the carrying value may not be recoverable. The
fair value is measured using an income approach based on the
present value of cash flows from contractual lease agreements
and projected future lease payments, including contingent
rentals where appropriate, which extend to the end of the
aircrafts economic life in its highest and best use
configuration, as well as a disposition value, based on
expectations of market participants.
|
|
|
|
AVGs: We measure the fair value of AVGs at the
inception of the agreement based upon the proceeds received.
Subsequent non-recurring fair value measurements are based upon
the differential between the contractual strike price and the
fair value of the underlying aircraft, measured using the
methodology described above.
|
Fair
Value Hierarchy
GAAP establishes a three-level valuation hierarchy for
disclosure of fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels
are defined as follows:
|
|
|
|
|
Level 1: Fair value measurements that are
quoted prices (unadjusted) in active markets. Market price data
generally is obtained from exchange markets. Our actively traded
listed marketable securities are measured at fair value on a
recurring basis and classified as level 1 inputs.
|
|
|
|
Level 2: Fair value measurements based on
inputs other than quoted prices included in Level 1 that
are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for
similar assets and liabilities in active markets other than
quoted prices that are observable for the asset or liability,
such as interest rates and yield curves that are observable at
commonly quoted intervals. Our derivative assets and liabilities
are measured on a recurring basis and classified as level 2.
|
|
|
|
Level 3: Fair value measurement based on
valuation techniques that use significant inputs that are
unobservable. These measurements include circumstances in which
there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair
value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy,
within which the fair value measurement in its entirety falls,
is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. Our
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment. In making
the assessment, we consider factors specific to the asset or
liability. Assets and liabilities measured at fair value on a
non-recurring basis and classified as level 3 include
aircraft, net investment in finance and sales-type leases and
AVGs.
|
91
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note P
|
Fair
Value Measurements (Continued)
|
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis
The following table presents information about assets and
liabilities measured at fair value on a recurring basis at
December 31, 2010 and 2009, respectively, and indicates the
level of the valuation inputs used to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Netting(a)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
|
|
|
$
|
116,394
|
(b)
|
|
$
|
|
|
|
$
|
(56,244
|
)
|
|
$
|
60,150
|
|
Derivative liabilities
|
|
|
|
|
|
|
(56,244
|
)
|
|
|
|
|
|
|
56,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets, net
|
|
$
|
|
|
|
$
|
60,150
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
|
|
|
$
|
258,347
|
(b)
|
|
$
|
|
|
|
$
|
(67,490
|
)
|
|
$
|
190,857
|
|
Derivative liabilities
|
|
|
|
|
|
|
(67,490
|
)
|
|
|
|
|
|
|
67,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets, net
|
|
$
|
|
|
|
$
|
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
adjustments of $0.8 million and $24.2 million as of
December 31, 2010 and 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. Fair value of aircraft is determined using an income
approach based on the present value of cash flows from
contractual lease agreements, contingent rentals where
appropriate, and projected future lease payments, which extend
to the end of the aircrafts economic life in its highest
and best use configuration, as well as a disposition value,
based on the expectations of market participants.
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 year
ended December 31, 2010, we recorded the following charges
to record aircraft to their fair value:
|
|
|
|
|
Impairment charges and fair value adjustments aggregating
$550.0 million related to 77 aircraft as a result of
aircraft sales, potential sales, or other disposal plans. Of
these 77 aircraft, 60 were transferred to Flight equipment held
for sale, eight were sold (two of which were accounted for as
sales-type leases), two were designated for part-out, and seven
remain in our fleet held for use.
|
|
|
|
On December 1, 2010, Airbus announced new fuel efficient
engine options for its narrow body neo aircraft with expected
deliveries starting in 2016. At December 31, 2010, we had
identified 78 narrow body aircraft with first generation engines
in our fleet that we expect may be negatively impacted by the
introduction of the neo and, as part of our on-going fleet
assessment, we performed a recoverability analysis on those
aircraft, using revised cash flow assumptions. Based on this
recoverability analysis, 61 of these 78 aircraft were deemed
impaired and we recorded impairment charges of
$557.4 million for the three months ended December 31,
2010.
|
|
|
|
As a result of our ongoing recoverability assessments of our
entire fleet, we determined that the value of certain aircraft
within our fleet were not recoverable and recorded impairment
charges of $391.3 million to reduce the carrying value of
17 aircraft to fair market value.
|
92
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note P
|
Fair
Value Measurements (Continued)
|
Aggregate impairment charges and fair value adjustments recorded
on the 155 aircraft discussed above for the year ended
December 31, 2010, were $1,498.7 million. See
Note D Aircraft Impairment for more
information. The following table presents the effect on our
consolidated financial statements as a result of the
non-recurring impairment charges and fair value adjustments
recorded on Flight equipment for the year ended
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
Book
|
|
|
|
Value at
|
|
|
Charges and
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
Value at
|
|
|
|
December 31,
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
and Other
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Adjustments
|
|
|
Reclassifications
|
|
|
Sales
|
|
|
Adjustments
|
|
|
2010
|
|
|
|
(Dollars in millions)
|
|
|
Flight equipment under operating lease
|
|
$
|
4,940.1
|
|
|
$
|
(1,498.7
|
)
|
|
$
|
(2,275.5
|
)
|
|
$
|
(74.6
|
)
|
|
$
|
(218.0
|
)
|
|
$
|
873.3
|
|
Flight equipment held for sale
|
|
|
|
|
|
|
|
|
|
|
2,236.1
|
|
|
|
(1,979.5
|
)
|
|
|
(1.4
|
)
|
|
|
255.2
|
|
Net investment in finance and sales-type leases
|
|
|
|
|
|
|
|
|
|
|
30.2
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
30.1
|
|
Lease receivables and other assets
|
|
|
|
|
|
|
|
|
|
|
9.2
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,940.1
|
|
|
$
|
(1,498.7
|
)
|
|
$
|
0.0
|
|
|
$
|
(2,054.4
|
)
|
|
$
|
(219.5
|
)
|
|
$
|
1,167.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2009, based upon a
review of the recoverability of certain aircraft within our
fleet, the carrying value of three aircraft was deemed to have
been impaired. As a result, we recorded impairment charges
aggregating $52.9 million in Impairments of flight
equipment to be sold or disposed of on our Consolidated
Statement of Operations to reduce the carrying value of these
aircraft to fair value. We also recorded charges of
$34.7 million in Impairments and fair value adjustments of
flight equipment sold or to be disposed of on our Consolidated
Statement of Operations related to seven aircraft that were
subsequently sold. The fair values of all seven aircraft are
classified as level 3 valuations. The unobservable inputs
utilized in the calculation are described in our fair value
policy for aircraft above.
|
|
Note Q
|
Derivative
Financial Instruments
|
We use derivatives to manage exposures to interest rate and
foreign currency risks. At December 31, 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 in 2011, our interest rate swap
agreements mature through 2015, and our interest rate cap
agreements mature in 2018.
93
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note Q
|
Derivative
Financial Instruments (Continued)
|
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.
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 assets, net (see Note P 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
|
|
|
USD Fair Value
|
|
|
Notional Value
|
|
|
USD Fair Value
|
|
|
|
(In thousands)
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
625,717
|
|
|
$
|
(56,244
|
)
|
Foreign exchange swap agreements
|
|
|
1,000,000
|
|
|
|
114,431
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
|
$
|
114,431
|
|
|
|
|
|
|
$
|
(56,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap agreements
|
|
$
|
89,520
|
|
|
$
|
1,963
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
|
|
$
|
116,394
|
|
|
|
|
|
|
$
|
(56,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
|
|
$
|
258,347
|
|
|
|
|
|
|
$
|
(67,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Converts floating interest rate
debt into fixed rate debt.
|
94
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note Q
|
Derivative
Financial Instruments (Continued)
|
During the years ended December 31, 2010, 2009 and 2008, we
recorded the following in OCI related to derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
Gain (Loss)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Effective portion of change in fair market value of
derivatives(a)(b)
|
|
$
|
(107,524
|
)
|
|
$
|
160,617
|
|
|
$
|
(601,008
|
)
|
Amortization of balances of de-designated hedges and other
adjustments
|
|
|
3,372
|
|
|
|
(485
|
)
|
|
|
(742
|
)
|
Foreign exchange component of cross currency swaps credited
(charged) to income
|
|
|
225,700
|
|
|
|
(114,620
|
)
|
|
|
507,050
|
|
Income tax effect
|
|
|
(42,542
|
)
|
|
|
(15,929
|
)
|
|
|
33,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in cash flow hedges, net of taxes
|
|
$
|
79,006
|
|
|
$
|
29,583
|
|
|
$
|
(61,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes gains(losses) realized on
swaps that matured during 2010, 2009, and 2008 that were
de-designated as hedges and then subsequently redesignated, did
not have hedge accounting treatment, or were not perfectly
effective, for the entire term of the contracts. The amounts
included are $(15.4) million, $9.7 million and
($22.1) million in 2010, 2009, and 2008, respectively.
|
|
(b)
|
|
2010 and 2009 include
$23.3 million and $(12.7) million of combined CVA and
MVA, respectively.
|
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)
|
|
|
|
December 31,
|
|
Derivatives Designated as Cash Flow Hedges
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Interest rate swap agreements
|
|
$
|
(27,733
|
)
|
|
$
|
7,260
|
|
|
$
|
(79,575
|
)
|
Foreign exchange swap agreements(a)
|
|
|
(172,003
|
)
|
|
|
66,037
|
|
|
|
(503,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(199,736
|
)
|
|
$
|
73,297
|
|
|
$
|
(583,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
2010 and 2009 include
$23.3 million and $(12.7) million of combined CVA and
MVA, 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)
|
|
Location of Gain or (Loss) Reclassified from AOCI
|
|
December 31,
|
|
into Income (Effective Portion)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Interest rate swap agreements interest expense
|
|
$
|
(31,682
|
)
|
|
$
|
(36,916
|
)
|
|
$
|
(14,613
|
)
|
Foreign exchange swap agreements interest expense
|
|
|
(60,306
|
)
|
|
|
(49,681
|
)
|
|
|
38,999
|
|
Foreign exchange swap agreements lease revenue
|
|
|
(224
|
)
|
|
|
(723
|
)
|
|
|
(6,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(92,212
|
)
|
|
$
|
(87,320
|
)
|
|
$
|
17,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note Q
|
Derivative
Financial Instruments (Continued)
|
We estimate that within the next twelve months, we will amortize
into earnings approximately $65.9 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 Consolidated Statements of Operations for the years ended
December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Recognized in Income on
|
|
|
|
Derivatives (Ineffective
|
|
|
|
Portion)(a)
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Derivatives Designated as Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
(156
|
)
|
|
$
|
(868
|
)
|
|
$
|
(1,768
|
)
|
Foreign exchange swap agreements
|
|
|
(26,788
|
)
|
|
|
12,791
|
|
|
|
(16,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(26,944
|
)
|
|
|
11,923
|
|
|
|
(18,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as a Hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap agreements(b)
|
|
|
(2,062
|
)
|
|
|
(647
|
)
|
|
|
|
|
Reconciliation to Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income effect of maturing derivative contracts
|
|
|
(15,409
|
)
|
|
|
9,689
|
|
|
|
(22,110
|
)
|
Reclassification of amounts de-designated as hedges recorded in
AOCI
|
|
|
(3,372
|
)
|
|
|
485
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect from derivatives, net of change in hedged items due to
changes in foreign exchange rates
|
|
$
|
(47,787
|
)
|
|
$
|
21,450
|
|
|
$
|
(39,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
All components of each
derivatives gain or loss were included in the assessment
of effectiveness.
|
|
(b)
|
|
An additional $(0.1) million
and $(0.8) million of amortization of premium paid to the
derivative counterparty was recognized in Interest expense
during the years ended December 31, 2010 and 2009,
respectively.
|
|
|
Note R
|
Fair
Value Disclosures of Financial Instruments
|
We used the following methods and assumptions in estimating our
fair value disclosures for financial instruments:
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: The fair value of our
long-term fixed-rate debt is estimated using discounted cash
flow analyses, based on our spread to U.S. Treasury bonds
for similar debt at year-end. The fair value of our long-term
floating rate debt is estimated using discounted cash flow
analysis based on credit default spreads.
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.
AVGs: Guarantees entered into after
December 31, 2002, are included in Accrued interest and
other payables on our Consolidated Balance Sheets. Fair value is
approximately equal to unamortized fees.
96
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note R
|
Fair
Value Disclosures of Financial
Instruments (Continued)
|
The carrying amounts and fair values of our financial
instruments at December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
of Asset
|
|
of Asset
|
|
of Asset
|
|
of Asset
|
|
|
(Liability)
|
|
(Liability)
|
|
(Liability)
|
|
(Liability)
|
|
|
(Dollars in thousands)
|
|
Cash
|
|
$
|
3,524,750
|
(a)
|
|
$
|
3,524,750
|
|
|
$
|
652,067
|
(a)
|
|
$
|
652,067
|
|
Notes receivable
|
|
|
65,065
|
|
|
|
64,622
|
|
|
|
102,213
|
|
|
|
97,600
|
|
Debt financing (including foreign currency adjustment and
subordinated debt and excluding debt discount)
|
|
|
(27,789,786
|
)
|
|
|
(28,267,765
|
)
|
|
|
(30,112,395
|
)
|
|
|
(26,762,955
|
)
|
Derivative assets, net(b)
|
|
|
60,150
|
|
|
|
60,150
|
|
|
|
190,857
|
|
|
|
190,857
|
|
AVGs
|
|
|
(10,013
|
)
|
|
|
(11,654
|
)
|
|
|
(10,860
|
)
|
|
|
(12,886
|
)
|
|
|
|
(a)
|
|
Includes restricted cash of
$457.1 million (2010) and $315.2 million (2009).
|
|
(b)
|
|
Includes combined CVA and MVA of
$23.3 million (2010) and $(12.7) million (2009).
|
|
|
Note S
|
Flight
Equipment Rent
|
We sold two aircraft in 2006, which were accounted for as
sale-leaseback transactions. We prepaid the total contracted
lease payments. The prepaid lease payments are recognized as an
expense in Flight Equipment Rent ratably over the lease-back
period. Prepaid rent in the amounts of $36.5 million and
$54.5 million are included in Lease Receivables and other
assets on our 2010 and 2009 Consolidated Balance Sheets,
respectively. Flight Equipment Rent includes the recognition of
rent expense related to the years ended December 31, 2010,
2009 and 2008. We will charge $18.0 million to Flight
Equipment Rent for each of the years 2011 through 2012 in
recognition of such rent expense.
|
|
Note T
|
Out of
Period Adjustments
|
In 2010, ILFC recorded out of period adjustments related to
prior years, which decreased pre-tax income by
$40.9 million. The out of period adjustments related to
(i) the depreciable lives of overhaul costs that
were incurred by ILFC directly over the period of 2003 to 2010,
and (ii) certain pension costs under a non-qualified
plan covering certain ILFC employees for the service period 1996
to 2010. Management has determined after evaluating the
quantitative and qualitative aspects of these corrections that
ILFCs current and prior period financial statements are
free of material errors.
|
|
Note U
|
Subsequent
Events
|
Revolving
Credit Facility
On January 31, 2011, we entered into a new
$2.0 billion unsecured three-year revolving credit facility
with a group of 11 banks that expires on January 31, 2014.
This revolving credit facility provides for interest rates based
on either a base rate or LIBOR plus an applicable margin
determined by a ratings-based pricing grid. The credit agreement
contains customary events of default and restrictive covenants,
including financial covenants that require us to maintain a
minimum fixed charge coverage ratio, a minimum consolidated
tangible net worth and a maximum ratio of consolidated debt to
consolidated tangible net worth.
AIG
Recapitalization
On January 14, 2011, AIG was recapitalized and the FRBNY
Credit Facility was repaid and terminated through a series of
transactions, including the Master Transaction Agreement. Upon
closing of the recapitalization,
97
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note U
|
Subsequent
Events (Continued)
|
we must get consent from the Department of Treasury, rather than
the FRBNY, to take the significant actions specified in the
Master Transaction Agreement.
In the first quarter of 2011, we signed a memorandum of
understanding to purchase 75 A320neos and 25 A321neos from
Airbus, which will replace our previous A380 commitments, and a
purchase agreement for 33
737-800
aircraft from Boeing. The estimated aggregate purchase price for
the 133 aircraft is approximately $7.5 billion and the
aircraft will deliver through 2019.
|
|
Note V
|
Quarterly
Financial Information (Unaudited)
|
We have set forth below selected quarterly financial data for
the years ended December 31, 2010 and 2009. The following
quarterly financial information for each of the three months
ended and at March 31, June 30, September 30, and
December 31, 2010 and 2009 is unaudited. As stated in
Note A Basis of Preparation, the
classification of certain revenue and expense amounts in our
prior period financial statements were revised to conform to
current period presentation. We have presented these amounts
separately below, both as reported and as revised.
As previously reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
901,588
|
|
|
$
|
1,244,095
|
|
|
$
|
1,287,296
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Pre-tax (Loss) Income(a)
|
|
|
(98,612
|
)
|
|
|
174,358
|
|
|
|
(157,185
|
)(b)
|
|
|
N/A
|
|
|
|
N/A
|
|
Net (Loss) Income(a)
|
|
|
(62,926
|
)
|
|
|
110,753
|
|
|
|
(105,535
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,278,080
|
|
|
$
|
1,330,153
|
|
|
$
|
1,347,179
|
|
|
$
|
1,366,329
|
|
|
$
|
5,321,741
|
|
Pre-tax Income
|
|
|
314,902
|
|
|
|
364,397
|
|
|
|
380,887
|
|
|
|
335,981
|
(c)
|
|
|
1,396,167
|
|
Net Income
|
|
|
202,957
|
|
|
|
236,925
|
|
|
|
245,813
|
|
|
|
209,934
|
|
|
|
895,629
|
|
|
|
|
|
(a)
|
During 2010, we recorded impairment charges and fair value
adjustments of $353.4 million, $61.2 million,
$407.4 million and $676.7 million during the first,
second, third and fourth quarter, respectively, related to 155
aircraft.
|
|
|
(b)
|
In the third quarter of 2010, we recorded an out of period
adjustment which decreased pretax income by $20.2 million
related to prior quarters and years and relating to certain
pension costs under a non qualified plan covering certain ILFC
employees for the service period of
1996-2010.
|
|
|
(c)
|
In the fourth quarter of 2009, we recorded impairment charges
aggregating $52.9 million related to three aircraft.
|
Revised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
|
(Dollars in thousands)
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,244,132
|
|
|
$
|
1,174,338
|
|
|
$
|
1,211,534
|
|
|
$
|
1,168,876
|
|
|
$
|
4,798,880
|
|
Pre-tax (Loss) Income(a)
|
|
|
(98,612
|
)
|
|
|
174,358
|
|
|
|
(157,185
|
)
|
|
|
(510,429
|
)(c)
|
|
|
(591,868
|
)
|
Net (Loss) Income(a)
|
|
|
(62,926
|
)
|
|
|
110,753
|
|
|
|
(105,535
|
)
|
|
|
(326,050
|
)
|
|
|
(383,758
|
)
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,201,629
|
|
|
$
|
1,256,070
|
|
|
$
|
1,278,728
|
|
|
$
|
1,265,571
|
|
|
$
|
5,001,998
|
|
Pre-tax Income
|
|
|
314,902
|
|
|
|
364,397
|
|
|
|
380,887
|
|
|
|
335,981
|
(b)
|
|
|
1,396,167
|
|
Net Income
|
|
|
202,957
|
|
|
|
236,925
|
|
|
|
245,813
|
|
|
|
209,934
|
|
|
|
895,629
|
|
98
INTERNATIONAL
LEASE FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note V
|
Quarterly
Financial Information (Unaudited) (Continued)
|
|
|
|
|
(a)
|
During 2010, we recorded impairment charges and fair value
adjustments of $353.4 million, $61.2 million,
$407.4 million and $676.7 million during the first,
second, third and fourth quarter, respectively, related to 155
aircraft.
|
|
|
(b)
|
In the fourth quarter of 2009, we recorded impairment charges
aggregating $52.9 million related to three aircraft.
|
|
|
(c)
|
In the fourth quarter of 2010, we recorded an out of period
adjustment which decreased pretax income by $20.7 million
related to prior quarters and years and relating to the
depreciable lives of overhaul costs that were incurred by ILFC
directly over the period of 2003 to 2010.
|
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 9, 2011
INTERNATIONAL LEASE FINANCE
CORPORATION
|
|
|
|
By
|
/s/ FREDERICK
S. CROMER
|
Frederick S. Cromer
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
date indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ HENRI
COURPRON
Henri
Courpron
|
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
March 9, 2011
|
|
|
|
|
|
/s/ ALAN
H. LUND
Alan
H. Lund
|
|
President, Director and Vice Chairman of the Board
|
|
March 9, 2011
|
|
|
|
|
|
/s/ DOUGLAS
M. STEENLAND
Douglas
M. Steenland
|
|
Director and Chairman of the Board
|
|
March 9, 2011
|
|
|
|
|
|
/s/ ROBERT
H. BENMOSCHE
Robert
H. Benmosche
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ WILLIAM
N. DOOLEY
William
N. Dooley
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ LESLIE
L. GONDA
Leslie
L. Gonda
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ DAVID
L. HERZOG
David
L. Herzog
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ FREDERICK
S. CROMER
Frederick
S. Cromer
|
|
Senior Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
March 9, 2011
|
|
|
|
|
|
/s/ KURT
H. SCHWARZ
Kurt
H. Schwarz
|
|
Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
|
|
March 9, 2011
|
100
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF
THE ACT.
Since the Registrant is an indirect wholly-owned subsidiary of
AIG, no annual report to security holders or proxy statement,
form of proxy or other proxy soliciting materials has been sent
to security holders since January 1, 1990.
101