By Doug Cameron and Daniel Michaels 
 

The aircraft leasing unit of American International Group Inc. (AIG) said Monday its parent company had provided $2 billion in U.S. government-backed funds to cover expiring commercial bank debt.

International Lease Finance Corp. had already secured $1.7 billion from AIG in March to help it through a funding crisis that could have rippled through the global airline industry because of its position as one of the world's largest airplane lessors.

(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

AIG, which is 80% owned by the U.S. government, drew down the $2 billion from funds already pledged by the Federal Reserve Bank of New York. Both the new AIG loan and the March loans, totaling $3.4 billion, are backed by ILFC aircraft valued at $7.4 billion, according to a regulatory filing.

Philip Baggaley, Senior Transportation Credit Analyst at Standard & Poors in New York, said the transaction suggests AIG and the New York Fed want to retain and support ILFC for the foreseeable future.

"It indicated ILFC has long-term value and AIG believes that the Federal Reserve is going to give them a chance to prove that, but ILFC is cut off from capital markets," Baggaley said.

Baggaley said the move is "consistent with the apparent plan to hold onto ILFC until better market conditions prevail and secure a higher value." AIG shelved plans to sell ILFC during the summer. That presented the leasing unit with the challenge of how to cover $2 billion in debt from commercial banks expiring on Oct. 15. Many industry officials thought ILFC would seek to roll over the debt but questioned where it could get financing on profitable terms after multiple downgrades of its credit rating.

ILFC until last year was able to borrow billions of dollars inexpensively in short-term debt markets without pledging airplanes as collateral. It is limited in how much of its fleet of more than 1,000 planes it can use as collateral for loans.

The insurer dropped the sale plan because investors' bids were below expectations and because of complexities refinancing ILFC's more than $30 billion in debt, according to people familiar with the issue.

Among many options now under consideration is a plan under which ILFC Chairman and Chief Executive Steven Udvar-Hazy is seeking to raise several billion dollars from investors to buy part of ILFC's fleet and establish a new leasing company.

-By Doug Cameron, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com