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Comment: Is there value for private equity in aircraft finance?

Aircraft finance, a business that was booming before the credit crunch struck, is now reeling, and many financial institutions are looking to sell these businesses. Among them is stricken US financial conglomerate American International Group, which is seeking a buyer for its International Lease Finance Corporation aircraft leasing business.

ILFC, which has a book value of around USD7bn, is expected to attract bids from private equity groups including Thomas H. Lee Partners, Carlyle Group, Greenbriar Equity Group and Onex in the second round of an auction early next month.

Other institutions anxious to shed their aircraft finance businesses include Royal Bank of Scotland, part of an effort by the UK bank to sell off non-core activities after record losses entailed a massive injection of public funds that brought it into state ownership.

Private equity firms are already well established in the aircraft finance business buyers, since Terra Firma's aircraft leasing platform, AWAS, acquired Pegasus Aviation Finance from Oaktree Capital in May 2007 for USD5.2bn. But now there are reasons why private equity players might be having second thoughts.

Aviation finance has always been surrounded by complex technical issues and financial uncertainties. While potentially highly expensive, it can be lucrative if conducted properly and if the business cycle is favourable.

With correct financing and security structures, in conjunction with effective tax planning, many of the inherent liabilities can be identified and accounted for. Many international aviation finance firms are headquartered in Ireland to take advantage of low corporation tax rates, an extensive double tax treaty network and well-qualified personnel.

But in the current economic environment, in which the notoriously unprofitable airline industry looks horribly vulnerable, it's uncertain whether even these factors outweigh the risks. The result of the AIG and RBS sales will give a clue about whether the private equity firms can make the sums add up.

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