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Spinoff of AIG air leasing unit faces CFIUS challenge

by William McConnell In Washington  |  Published December 12, 2012 at 10:51 AM
American International Group Inc. said Sunday that U.S. national security regulators will investigate the company's plan to sell almost all of its commercial aircraft leasing unit to Chinese investors.

AIG to trying to sell up to 90% of its stake in International Lease Finance Corp. to an investor group led by Weng Xianding, chairman of New China Trust Co. Ltd. The deal is valued to be worth up to $5.28 billion.

The transaction comes as attempts by Chinese investors to acquire U.S.-based assets are drawing increased scrutiny from Washington. The two latest deals that have raised security concerns are Cnooc Ltd.'s planned $19.4 billion acquisition of Canadian oil and gas producer Nexen Inc., which has U.S. assets in the Gulf of Mexico, and Wanxiang Group Corp.'s purchase of battery maker A123 Systems Corp. out of bankruptcy.

Already anticipating heightened scrutiny for the deal, the ILFC purchase is structured as a two-step process. An investor group comprised of New China Trust, China Aviation Industrial Fund and P3 Investments Ltd. will first acquire 80.1% of ILFC for approximately $4.23 billion, with an option to acquire an additional 9.9% stake for $523 million.

According to the companies' merger agreement, the option may be exercised by March 15, 2013, or 10 days after approval of the transaction and the option by the Committee on Foreign Investment in the United States, whichever comes later.

If CFIUS approves both steps, the investor group is expected to be expanded to include New China Life Insurance Co. Ltd. and an investment arm of ICBC International Holdings Ltd. Exercise of the option also requires approval of Chinese authorities.

AIG said it expects the transaction to close in the second quarter of 2013.

Wiley Rein LLP partner Nova Daly, who ran CFIUS investigations from 2006 through 2009 as U.S. Treasury Department deputy assistant secretary for investment security and policy, said it is unlikely that the CFIUS review will go quickly. "I don't think this is going to be an easily completed transaction," he said.

Daly said it was apparent there would be a challenging CFIUS review for the ILFC spinoff ever since AIG began selling off assets to help it pay back its $183 billion bailout by the federal government in 2008.

"CFIUS is going to look at whether the deal will affect the ability of leading domestic carriers to lease planes and whether U.S. air carriers will lose any control of their ability to manage their fleets," he said.

The Federal Aviation Act already prohibits foreigners from owning more than 25% of an American airline. With commercial airliners relying on jet leasing companies to maintain capacity, that rule could provide CFIUS with the rationale for declaring that foreign ownership of the lessors presents similar national security concerns.

The United States has long restricted ownership and control of U.S. airlines for four primary reasons, according to a 2003 report by the General Accounting Office: protection of the once-fledgling U.S. airline industry, regulation of international air service through bilateral agreements, concern about allowing foreign aircraft access to U.S. airspace, and military reliance on civilian airlines to supplement airlift capacity.

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Tags: A123 Systems Corp. | aircraft leasing | American International Group Inc. | CFIUS | China Aviation Industrial Fund | Cnooc Ltd. | Federal Aviation Act | ICBC International Holdings Ltd. | International Lease Finance Corp. | New China Life Insurance Co. Ltd. | New China Trust Co. Ltd. | Nexen Inc. | P3 Investments Ltd. | Treasury Department | Wanxiang Group Corp. | Weng Xianding | Wiley Rein LLP

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