News Column

INTERNATIONAL LEASE FINANCE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 2, 2014

Cautionary Statement Regarding Forward-looking Information

This quarterly report on Form 10-Q and other publicly available documents may contain or incorporate statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Form 10-Q and include statements regarding, among other matters, our pending sale to AerCap, the Reorganization and its potential impact, 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 the headings "Part I-Item 1A. Risk Factors," in our 2013 Annual Report on 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.



Overview

We are the world's largest independent aircraft lessor, measured by number of owned aircraft, with approximately 1,000 owned or managed aircraft. As of March 31, 2014, we owned 906 aircraft in our leased fleet. The weighted average age of our owned aircraft, weighted by the net book value of such aircraft, was 8.8 years at March 31, 2014. The aggregate net book value of our flight equipment, including nine aircraft in AeroTurbine's leased fleet, was $32.1 billion at March 31, 2014. We had 23 additional aircraft in the fleet classified as finance and sales-type leases and provided fleet management services for 68 aircraft. Our fleet features popular aircraft types, including both narrowbody and widebody aircraft. In addition to our existing fleet, as of March 31, 2014, we had commitments to purchase 322 new aircraft, with delivery dates through 2022, including 12 through sale-leaseback transactions. These new aircraft commitments are comprised of 150 Airbus A320neo family aircraft, 20 Airbus A350 aircraft, six Airbus A321 aircraft, 67 Boeing 787 aircraft, 29 Boeing 737-800 aircraft and 50 E-Jets E2 aircraft, marking the introduction of the E-Jets aircraft to our fleet. We intend to continue to complement our orders from aircraft manufacturers with opportunistic acquisitions of additional aircraft from third parties, which may include sale-leaseback transactions with airlines. We balance the benefits of holding and leasing our aircraft and selling or parting-out the aircraft depending on economics, opportunities and risks. Under the terms of our leases, the lessee is generally responsible for all operating expenses, which customarily include maintenance, fuel, crews, airport and navigation charges, taxes, licenses, aircraft registration and insurance premiums. We, however, generally contribute to certain maintenance events a lessee incurs during the lease of a used aircraft and, if an aircraft is returned due to a lessee ceasing operations or failing to meet its obligations under a lease, we may incur costs to repossess and prepare the aircraft for re-lease. Our leases are generally for a fixed term, although they may include early termination rights or extension options. Our leases require all non-contingent payments to be made in advance and our leases are predominantly denominated in U.S. dollars. Our lessees are generally required to continue to make lease payments under all circumstances, including periods during which the aircraft is not in 36



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operation due to maintenance or grounding. We typically contract to re-lease aircraft before the end of the existing lease term. For aircraft returned before the end of the lease term due to exceptional circumstances, we have generally been able to re-lease the aircraft within two to six months of their return. The weighted average lease term remaining on our current leases, weighted by net book value of our aircraft, was 4.3 years as of March 31, 2014. In addition to our leasing activities, we provide fleet management services to investors or owners of aircraft portfolios for a management fee. Through our wholly-owned subsidiary AeroTurbine, we provide engine leasing; certified aircraft engines, airframes, and engine parts; and supply chain solutions, and we possess the capabilities to disassemble aircraft and engines into parts. These capabilities allow us to maximize the value of our aircraft and engines across their complete life cycle and offer an integrated value proposition to our airline customers as they transition out aging aircraft. At times, we also sell aircraft from our leased aircraft fleet to other leasing companies, financial services companies, and airlines. In limited cases, we have previously contracted to provide asset value guarantees to financial institutions and other third parties for a fee, some of which are still outstanding. We operate our business on a global basis, deriving approximately 93% of our revenues from airlines outside of the United States. As of March 31, 2014, we had 897 aircraft leased under operating leases to 164 customers in 77 countries, with no lessee accounting for more than 10% of lease revenue for the three months ended March 31, 2014. At March 31, 2014, our operating lease portfolio included nine aircraft not subject to a signed lease agreement or a signed letter of intent. As of April 25, 2014, one of these nine aircraft was subsequently sold, one aircraft was parted-out, and the remaining seven aircraft may be parted-out or sold. None of these nine aircraft met the criteria for being classified as held for sale. As of March 31, 2014, we had 62 aircraft that were subject to leases expiring during the remainder of 2014. As of April 25, 2014, 29 of these 62 aircraft were not yet subject to a signed lease agreement or a signed letter of intent following the expiration of their current leases. Of these 29 aircraft, 17 may be parted-out or sold, but did not meet the criteria for being classified as held for sale. If the current customers of the remaining 12 aircraft do not extend these leases, we will be required to find new customers for these aircraft. We also maintain relationships with 15 additional customers who operate aircraft we manage.



Our results of operations are affected by a variety of factors, primarily:

the number, type, age and condition of the aircraft we own; aviation industry market conditions, including events affecting air travel; the demand for our aircraft and the resulting lease rates we are able to obtain for our aircraft; the purchase price we pay for our aircraft; the number, types and sale prices of aircraft, or parts in the event of a part-out of an aircraft, we sell in a period;



the ability of our lessee customers to meet their lease obligations

and maintain our aircraft in airworthy and marketable condition; the utilization rate of our aircraft; our expectations of future overhaul reimbursements and lessee maintenance contributions; changes in interest rates and credit spreads, which may affect our aircraft lease revenues and our borrowing costs; and our ability to fund our business. Regional and global economic and political conditions influence consumer demand, fuel prices and the availability of credit to the aviation industry, which in turn impacts airline profitability, cash flows and liquidity. Despite challenging conditions in the past several years which have resulted in airline failures and 37



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have negatively impacted our financial results, we are optimistic about the long-term future of air transportation and the growing role that the leasing industry and ILFC, in particular, will play in commercial air transport.

At April 25, 2014, we had signed leases for all but three of our 60 new aircraft deliveries through 2015. We have contracted with Airbus, Boeing, and Embraer to purchase new fuel-efficient aircraft with delivery dates through 2022. These aircraft are in high demand from our airline customers. In many cases, we have delivery positions for the most modern and fuel-efficient aircraft earlier than the airlines can obtain such aircraft from the manufacturers. At March 31, 2014, we had agreements to purchase 12 new aircraft from airlines through sale-leaseback transactions with scheduled delivery dates in 2014 and 2015. We believe that, with respect to our used aircraft, we have the market reach, visibility and understanding to best deploy our aircraft across jurisdictions. We are focused on increasing our presence in frontier and emerging markets that have high potential for passenger growth and other markets that have significant demand for new aircraft. We have assembled a highly skilled and experienced management team and have secured sufficient liquidity to manage through expected market volatility. We have also demonstrated strong and sustainable financial performance through most airline industry cycles. For these reasons, we believe that we are well positioned to manage the current cycle and over the long-term.



Recent Developments relating to Our Potential Sale

On December 16, 2013, AIG and AIG Capital Corporation ("Seller"), a wholly-owned direct subsidiary of AIG, entered into a definitive agreement (the "AerCap Share Purchase Agreement") with AerCap and AerCap Ireland Limited ("Purchaser"), a wholly-owned subsidiary of AerCap, for the sale of 100 percent of our common stock by Seller to Purchaser (such transaction, the "AerCap Transaction") for consideration consisting of $3.0 billion of cash, a portion of which will be funded by a special distribution of $600.0 million to be paid by us to AIG upon consummation of the transaction, and approximately 97.6 million newly-issued AerCap common shares. The consideration has a value of approximately $5.4 billion based on AerCap's pre-announcement closing price per share of $24.93 on December 13, 2013. Upon closing of the AerCap Transaction, AIG will own approximately 46 percent of the common stock of AerCap. Under the terms of the AerCap Share Purchase Agreement, consummation of the AerCap Transaction is subject to the satisfaction or waiver of a number of conditions precedent, such as certain customary conditions and other closing conditions, including the receipt of approvals or non-disapprovals from antitrust and other regulatory bodies. The AerCap Transaction was approved by AerCap shareholders on February 13, 2014 and is expected to close in the second quarter of 2014. In addition to other customary termination events, the AerCap Share Purchase Agreement allows termination by (i) AIG, Seller or Purchaser if the closing of the AerCap Transaction has not occurred on or before September 16, 2014 (the "Long-Stop Date"), subject to an extension to December 16, 2014 for the receipt of certain approvals; (ii) AIG, Seller or Purchaser in the event that approvals or non-disapprovals from certain regulatory bodies have not been obtained by the Long-Stop Date (as extended); (iii) AIG or Seller, if the AerCap board of directors withdraws or adversely modifies its approval of the AerCap Transaction; or (iv) AIG or Seller if all conditions are satisfied, AIG and Seller are prepared to close but Purchaser fails to close the AerCap Transaction as required. Under the AerCap Share Purchase Agreement, we are subject to certain operating covenants before the closing of the transaction. These covenants include a requirement that ILFC continue to conduct business in the ordinary course, seek approval from AerCap before taking certain actions, and seek waivers or amendments to certain financing agreements containing covenants that would otherwise be triggered by the transaction. The agreement also places certain restrictions on the operations of the Company, including with respect to leasing, acquisitions, dispositions, indebtedness, human resources and other matters. 38



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Currently, under the agreement AIG has entered into with AerCap, net tax payments under our tax sharing agreement with AIG have been temporarily suspended, and our tax sharing agreement with AIG will be terminated upon the consummation of the AerCap Transaction. AerCap has notified us that, immediately after the closing of our sale to AerCap, it intends to transfer our assets substantially as an entirety to AGAT, a wholly-owned subsidiary of AerCap, and AGAT will assume substantially all of our liabilities in connection with the transfer, which we refer to as the Reorganization. We understand from AerCap that, as a result of the Reorganization, it expects AGAT to have its tax residency established in Ireland, which may result in tax savings under Ireland's more favorable tax environment. In anticipation of the Reorganization, we have recently entered into amendments to certain of our debt agreements in order to reflect the Reorganization and to provide substantially the same level of credit support after the Reorganization as the holders of ILFC debt currently receive. Under the amendments to our debt agreements for our 2011 Secured Term Loan, 2012 Secured Term Loan, 2014 Secured Term Loan, Ex-Im financing, ECA financing, revolving credit facility and AeroTurbine revolving credit facility, AGAT has agreed, upon the effectiveness of the Reorganization, to assume the obligations and performance of certain covenants to be performed or observed by ILFC, and AerCap and certain subsidiaries of AerCap have agreed, upon the effectiveness of the Reorganization, to guarantee the obligations and the performance of certain covenants to be performed or observed by ILFC. ILFC has also agreed to continue to be an obligor under these debt agreements. The amendments to the revolving credit facility also extend maturities, add financial covenants and revise certain other financial and restrictive covenants. The new and revised financial covenants will be measured on a consolidated basis for AerCap and its subsidiaries. In addition, upon the effectiveness of the Reorganization, AGAT will, by the terms of the indentures governing our secured and unsecured bonds, become the successor obligor of the secured and unsecured bonds issued under our indentures, including the bonds issued under our shelf registration statements filed with the SEC. As a result, AGAT will assume our reporting obligations after the effectiveness of the Reorganization. AerCap has also notified us that it intends for ILFC to also remain as an obligor for the secured and unsecured bonds and that AerCap and certain of its subsidiaries will also provide guarantees of AGAT's and ILFC's obligations under the secured and unsecured bonds. At the completion of the transaction, we expect to apply purchase accounting to our consolidated financial statements which will adjust the carrying values of our assets and liabilities to their then-current fair values. Following the closing of the transaction, we will adopt AerCap's accounting policies, which together with the application of purchase accounting, will impact the timing and amount of future revenues and expenses that we would recognize in our results of operations and may impact the classification of amounts recorded in our financial statements in subsequent periods.



Financial Overview

We had income before income taxes of $192.1 million for the three months ended March 31, 2014, compared to income before income taxes of $64.8 million for the same period in 2013, primarily due to (i) an increase in revenues from rental of flight equipment driven by an increase in net overhaul rentals recognized; (ii) an increase in gains on aircraft sales; and (iii) a decrease in interest expense due to a decrease in our average debt outstanding.



See "Results of Operations" herein for a detailed discussion of our results.

Capital Resources and Liquidity Developments

Significant capital resources and liquidity developments for the three months ended March 31, 2014 include the issuance of a $1.5 billion secured term loan maturing on March 6, 2021, bearing interest at LIBOR plus a margin of 2.75% with a 0.75% LIBOR floor. 39



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Our Revenues

Our revenues consist primarily of rental of flight equipment, flight equipment marketing and gain on aircraft sales and other income.

Rental of Flight Equipment

Our leasing revenue is principally derived from airlines and companies associated with the airline industry. Our aircraft leases generally provide for the payment of a fixed, periodic amount of rent. In certain cases, our leases provide for additional rental payments based on usage. The usage may be calculated based on hourly usage or on the number of cycles operated. A cycle is defined as one take-off and landing. Under the provisions of many of our leases, we also 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 generally not exceeding, related overhaul rentals that the lessee has paid to us. We recognize overhaul rental revenue net of estimated overhaul reimbursements. Estimated overhaul reimbursements are recorded as deferred overhaul rentals. Additionally, in connection with a lease of a used aircraft, we generally agree to contribute to certain maintenance events the lessee incurs during the lease. At the time we pay the agreed upon maintenance reimbursement, we record the reimbursement against deferred overhaul rentals to the extent we have received overhaul rentals from the lessee, and against return condition deficiency deposits, to the extent received from the prior lessee. We capitalize as lease incentives any amount of the actual maintenance reimbursement we pay in excess of overhaul rentals paid to us by the lessee and payments received from prior lessees for deficiencies in return conditions and amortize the lease incentives as a reduction of revenues from Rental of flight equipment over the remaining life of the lease.



The amount of lease revenue we recognize is primarily influenced by the following factors:

the contracted lease rate and overhaul rentals, which are highly dependent on the age, condition and type of the leased equipment; the lessees' performance of their lease obligations; the usage of the aircraft during the period; and our expectations of future overhaul reimbursements. In addition to aircraft or engine specific factors such as the type, condition and age of the asset, the lease rates for our leases may be determined in part by reference to the specified interest rate at the time the aircraft is delivered to the customer. The factors described in the bullet points above are influenced by airline industry conditions, global and regional economic trends, airline market conditions, the supply and demand balance for the type of flight equipment we own and our ability to remarket flight equipment subject to expiring lease contracts under favorable economic terms. Because the terms of our leases are generally for multiple years and have staggered maturities, there are lags between changes in market conditions and their impact on our results, as contracts not yet reflecting current market lease rates remain in effect. Therefore, current market conditions and any potential effect they may have on our results may not be fully reflected in current results. Management monitors all lessees that are behind in lease payments, and assesses relevant operational and financial issues, in order to determine the amount of rental income to recognize for past due amounts. Lease payments are due in advance and we generally recognize rental income only to the extent we have received payments or hold security and other deposits. 40



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Table of Contents Flight Equipment Marketing and Gain on Aircraft Sales Our sales revenue is generated from the sale of our aircraft and engines and any gains on such sales are recorded in Flight equipment marketing and gain on aircraft sales. The price we receive for our aircraft and engines is largely dependent on the condition of the asset being sold, airline market conditions, funding availability to the buyer and the supply and demand balance for the type of asset we are selling. The timing of the closing of aircraft and engine sales is often uncertain, as a sale may be concluded swiftly or negotiations may extend over several weeks or months. As a result, even if sales are comparable over a long period of time, during any particular fiscal quarter or other reporting period, we may close significantly greater or fewer sale transactions than in other reporting periods. Accordingly, gain on aircraft sales recorded in one fiscal quarter or other reporting period may not be comparable to gain on aircraft sales in other periods. We also engage in the marketing of our flight equipment throughout the lease term, as well as the sale of third party owned flight equipment and other marketing services on a principal and commission basis.



Other Income

Other income includes (i) gross profit on sales from AeroTurbine of engines, airframes, parts and supplies; (ii) fees from early lease terminations; (iii) management fee revenue we generate through a variety of management services that we provide to non-consolidated aircraft securitization vehicles and joint ventures and third party owners of aircraft; and (iv) interest income. Income from AeroTurbine's engine, airframes, parts and supplies sales are included in Other income, net of cost of sales. The price AeroTurbine receives for engines, airframes, parts and supplies is largely dependent on the condition of the asset being sold, airline market conditions and the supply and demand balance for the type of asset being sold. Our management services may include leasing and remarketing services, cash management and treasury services, technical advisory services and accounting and administrative services depending on the needs of the aircraft owner. Our interest income is derived primarily from interest recognized on cash and short term investments, finance and sales-type leases and notes receivables recorded in connection with lease restructurings, or in limited circumstances, in connection with sales of aircraft from our fleet. The amount of interest income we recognize in any period is influenced by the amount of our cash and short term investments, the principal balance of finance and sales-type leases and notes receivables we hold, and effective interest rates.



Our Operating Expenses

Our operating expenses primarily consist of interest on debt, depreciation, aircraft impairment charges, aircraft costs, selling, general and administrative expenses and other expenses. Interest Expense Our interest expense in any period is primarily affected by changes in interest rates and outstanding amounts of indebtedness. Between 2010 and the end of 2011, we entered into debt financings with relatively higher interest rates than the debt outstanding at the time, partially as a result of our initiatives to extend our debt maturities. The weighted average of our debt maturities was 6.2 years as of March 31, 2014. While our weighted average effective cost of borrowing, which excludes the effect of amortization of deferred debt issue costs, increased during those two years, the decrease in our average debt outstanding due to our deleveraging efforts offset those increases starting in late 2011. However, since the beginning of 2012 we have been able to borrow at similar or lower interest rates as compared to the debt borrowed in 2010 and 2011. Our weighted average effective cost of borrowing was 5.79% at March 31, 2014 compared to 5.94% at December 31, 2013. Our weighted average effective cost of borrowing is our weighted average 41



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interest rate plus the net effect of interest rate swaps or other derivatives and the effect of debt discounts. It does not include the effect of amortization of deferred debt issue costs.



Our total debt outstanding at the end of each period and weighted average effective cost of borrowing, which excludes the effect of amortization of deferred debt issue costs, for the periods indicated were as follows:

[[Image Removed: GRAPHIC]] Depreciation Our depreciation expense is influenced by the adjusted carrying values of our flight equipment, the depreciable life and estimated residual value of the flight equipment. Adjusted carrying value is the original cost of our flight equipment, including capitalized interest during the construction phase, adjusted for subsequent capitalized improvements and impairments. We generally depreciate aircraft using the straight-line method over a 25-year life from the date of manufacture to an estimated residual value. See "Critical Accounting Policies and Estimates-Flight Equipment." below. However, management regularly reviews depreciation on our aircraft by aircraft type. At times, management may change useful lives or residual values of certain aircraft, as appropriate. Any such changes are accounted for on a prospective basis. 42



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Table of Contents Aircraft Impairment Charges and Fair Value Adjustments Management evaluates quarterly the need to perform a recoverability assessment of aircraft in our fleet considering the requirements under GAAP and performs this assessment at least annually for all aircraft in our fleet. Recoverability assessments are performed whenever events or changes in circumstances indicate that the carrying amount of our aircraft may not be recoverable. Some of these events or changes in circumstances may include potential disposals of aircraft (sales or part-outs), changes in contracted lease terms, changes in the lease status of an aircraft (leased, re-leased, or not subject to lease), repossessions of aircraft, 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. Recoverability of an aircraft's carrying amount is measured by comparing the carrying amount of the aircraft to the estimated future undiscounted cash flows expected to be generated by the aircraft. If the future undiscounted cash flows are less than the aircraft carrying amount, the aircraft is impaired and is re-measured to fair value in accordance with our Fair Value Policy. Our Fair Value Policy is described in Note N of Notes to Condensed, Consolidated Financial Statements. The difference between the fair value and the carrying amount of the aircraft is recognized as an impairment loss. Factors that have affected impairment charges in recent years include, but are not limited to: (i) unfavorable airline industry trends affecting the residual values of certain aircraft types; (ii) high fuel prices and development of more fuel-efficient aircraft shortening the useful lives of certain aircraft; (iii) management's expectations that certain aircraft were more likely than not to be parted-out or otherwise disposed of sooner than 25 years; and (iv) new technological developments. While we continue to manage our fleet by ordering new in-demand aircraft and maximizing our returns on our existing aircraft, we may incur additional impairment charges in the future. Impairment charges may result from future deterioration in lease rates, net overhaul rentals residual values, and shortened aircraft holding periods, which can be caused by new technological developments, sustained high fuel costs or prolonged economic distress, and decisions to sell or part-out aircraft at amounts below net book value. The potential for impairment or fair value adjustments could be material to our results of operations for an individual period.



Aircraft Costs

While lessees are generally responsible for maintenance of the aircraft under the provisions of the lease, we may incur costs to prepare the aircraft for re-lease when aircraft are returned early or repossessed and are not in satisfactory condition to re-lease. These costs generally consist of expenses incurred in preparing aircraft transitioning from one lessee to another and repossession-related expenses. Such costs are not capitalized and include, for example, repairs, storage, transportation, and paint. Aircraft costs will generally fluctuate with the number of aircraft repossessed.



Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of personnel expenses, including salaries, share-based compensation charges and employee benefits, professional and advisory costs, and office and travel expenses. The level of our selling, general and administrative expenses is influenced primarily by the number of employees, fluctuations in AIG's share price and the extent of transactions or ventures we pursue which require the assistance of outside professionals or advisors.



Other Expenses

Other expenses consist primarily of provision for losses on aircraft asset value guarantees, provision for credit losses on notes receivable and finance and sales-type leases and the effect of derivatives. Other expenses also include various non-recurring charges during certain periods. 43



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Our provision for losses on aircraft asset value guarantees represents charges made in the current period based on our estimate of losses on asset value guarantees that are probable of being exercised.

Our provision for credit losses on notes receivable consists primarily of allowances we establish to reduce the carrying value of our notes receivable to estimated collectible levels. Management 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 assessing relevant operational and financial issues. As of March 31, 2014, notes receivable were not material. Our provision for credit losses on finance and sales-type leases consists primarily of allowances we establish to reduce the carrying value of our net investment in these leases to estimated collectible amounts. Management monitors the activities and financial health of customers and evaluates the impact certain events, such as customer bankruptcies, will have on lessees' abilities to perform under the contracted terms of the related leases. Management reviews all outstanding leases classified as finance and sales-type to determine appropriate classification of the related aircraft within our fleet, and whether we should reserve for any portion of our net investment. The primary factors affecting our Other expenses are: (i) a deterioration in aircraft values, which may result in additional provisions for losses on aircraft asset value guarantees that are probable of being exercised; (ii) lessee credit deterioration or defaults, which may result in additional provisions for doubtful notes receivable; and (iii) volatility in the market value of derivatives not designated as hedges and the ineffectiveness of cash flow hedges.



Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based upon our Condensed, Consolidated Financial Statements, which have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.



We believe the following critical accounting policies could have a significant impact on our results of operations, financial condition and financial statement disclosures, and may require subjective and complex estimates and judgments:

Flight Equipment Lease Revenue Derivative Financial Instruments Fair Value Measurements Income Taxes We evaluate our estimates, including those related to flight equipment, inventory, lease revenue, derivative financial instruments, fair value measurements, and income taxes, on a recurring basis and non-recurring basis. We base our estimates on historical experience 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. For a detailed discussion on the application of our critical accounting policies, see Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013. The following discussion includes any material updates 44



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or any specific activity related to these accounting policies and estimates for the three months ended March 31, 2014:

Flight Equipment

Impairment Charges 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. Recoverability is measured by comparing the carrying amount of the aircraft to the estimated future undiscounted cash flows expected to be generated by the aircraft. The undiscounted cash flows used in the recoverability assessment include the current contractual lease cash flows and projected future non-contractual lease cash flows, both of which include estimates of net overhaul rental collections, where appropriate, extended to the end of our estimated holding period, and an estimated disposition value for each aircraft. If the future undiscounted cash flows are less than the aircraft carrying amount, the aircraft is impaired and is re-measured to fair value in accordance with our Fair Value Policy. Our Fair Value Policy is described in Note N of Notes to Condensed, Consolidated Financial Statements. The difference between the fair value and the carrying amount of the aircraft is recognized as an impairment loss. As part of our recurring recoverability assessment process, we update the critical and significant assumptions used in the recoverability assessment, including projected lease rates and terms, estimated net overhaul rental collections, residual values and estimated aircraft holding periods. Management uses its judgment when determining the assumptions used in the recoverability analysis, taking into consideration historical data, current macro-economic trends and conditions, any changes in management's estimated holding period for any aircraft and any events that occur before the financial statements are issued that management should consider, including subsequent lessee bankruptcies. Management is active in the aircraft leasing industry and develops the assumptions used in the recoverability assessment. Depreciable Lives and Residual Values: We generally depreciate our aircraft using the straight-line method over a 25-year life from the date of manufacture to an estimated residual value. When we change the useful lives or residual values of our aircraft, we adjust our depreciation rates on a prospective basis. Any change in the estimated useful lives or residual value assumptions affects depreciation expense and could have a significant impact on our results of operations for any one period. As of March 31, 2014, 97 of our aircraft, with a net book value of $1.0 billion, are being depreciated over useful lives of less than 25-years from the date of manufacture. The weighted average



useful life of these aircraft, weighted by the net book value of such aircraft, is 16.7 years.

Sensitivity Analysis: We did not record any aircraft impairment charges on flight equipment held for use for the three months ended March 31, 2014. If estimated future undiscounted cash flows used in a hypothetical full fleet assessment as of March 31, 2014, were decreased by 10% or 20%, 11 aircraft with a net book value of $332.7 million or 49 aircraft with a net book value of $1.4 billion, respectively, would have been impaired and written down to their resulting respective fair values. Impairment Charges and Fair Value Adjustments on Flight Equipment Sold or to be Disposed: Aircraft impairment charges and fair value adjustments on flight equipment sold or to be disposed aggregated $42.2 million for the three months ended March 31, 2014. We recorded impairment charges and fair value adjustments of (i) $20.9 million on two aircraft likely to be sold or sold; and (ii) $21.3 million on seven aircraft and two engines intended to be or designated for part-out.



Lease Revenue

Under the provisions of our leases, lessees are generally responsible for maintenance and repairs, including major maintenance (overhauls) over the term of the lease. Under the provisions of many of our 45



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leases, we receive overhaul rentals based on the usage of the aircraft. The usage is typically reported monthly by the lessee. For certain airframe and engine overhauls, we reimburse the lessee for costs incurred up to, but generally not exceeding, the overhaul rentals that the lessee has paid to us. We recognize overhaul rentals received, net of estimated overhaul reimbursements, as revenue. We estimate expected overhaul reimbursements during the life of the lease. This requires significant judgment. During the three months ended March 31, 2014 and 2013, we recognized net overhaul rental revenues of approximately $84.9 million and $4.5 million, respectively, from overhaul rental collections of $166.5 million and $159.1 million, respectively. The increase in net overhaul rental revenue recognized for the three months ended March 31, 2014 as compared to the same period in 2013, primarily reflects a decrease in overhaul rentals deferred. Additionally, in connection with a lease of a used aircraft, we generally agree to contribute to certain maintenance events the lessee incurs during the lease. At the time we pay the agreed upon maintenance reimbursement, we record the reimbursement against deferred overhaul rentals to the extent we have received overhaul rentals from the lessee, and against return condition deficiency deposits, to the extent received from the prior lessee. We capitalize as lease incentives any amount of the actual maintenance reimbursement we pay in excess of overhaul rentals paid to us by the lessee and payments received from prior lessees for deficiencies in return conditions and amortize the lease incentives as a reduction of revenues from Rental of flight equipment over the remaining life of the lease. We capitalized lease incentives of $19.4 million and $9.3 million, which included such maintenance contributions, for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014 and 2013, we amortized lease incentives as a reduction of revenues from Rental of flight equipment aggregating $11.0 and $17.0 million, respectively. Results of Operations



Three Months Ended March 31, 2014 Versus 2013

Flight Equipment: During the three months ended March 31, 2014, we had the following activity related to flight equipment:

Number of

Aircraft

Flight equipment at December 31, 2013



911

Aircraft purchases



4

Aircraft reclassified to Net investment in finance and sales-type leases

(1 ) Aircraft sold from Flight equipment (2 ) Aircraft designated for part-out



(6 )

Flight equipment at March 31, 2014(a) 906



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(a)

Excludes nine aircraft owned by AeroTurbine.

Income before Income Taxes: Our income before income taxes increased by approximately $127.3 million for the three months ended March 31, 2014, as compared to the same period in 2013, primarily due to (i) an increase in revenues from rental of flight equipment driven by an increase in net overhaul rentals recognized; (ii) an increase in gains on aircraft sales; and (iii) a decrease in interest expense due to a decrease in our average debt outstanding. See below for a detailed analysis of each category affecting income before income taxes. Rental of Flight Equipment: Revenues from rental of flight equipment increased to $1,048.6 million for the three months ended March 31, 2014 from $1,013.9 million for the same period in 2013. The average number of aircraft we owned during the three month period ended March 31, 2014, decreased to 909 compared to 919 for the period ended March 31, 2013. Revenues from rentals of flight equipment 46



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recognized for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 increased primarily due to (i) an $80.4 million increase in net overhaul rentals recognized due to the deferral of a higher proportion of overhauls collected during the three months ended March 31, 2013, as compared to the same period in 2014 consistent with expected future payouts at the time; and (ii) a $41.2 million increase from new aircraft added to our fleet that earned revenue for a greater number of days during the three months ended March 31, 2014, than during the same period in 2013. These increases in revenue were partially offset by decreases of (i) $60.2 million due to the re-lease of aircraft and extension of expiring leases, which will normally re-lease or extend at lower rental rates than the rates on the previous leases as the aircraft will be older; and (ii) $26.7 million related to aircraft in service during the three months ended March 31, 2013, and consigned or sold prior to March 31, 2014. At March 31, 2014, ten customers operating 36 aircraft were 60 days or more past due on minimum lease payments aggregating $2.9 million relating to some of those aircraft, of which, we recognized $2.7 million in rental income through March 31, 2014. One customer accounted for $1.0 million of the past due payments. In comparison, at March 31, 2013, six customers operating 13 aircraft were 60 days or more past due on minimum lease payments aggregating $1.5 million relating to some of those aircraft, $1.2 million of which related to two customers. Of this amount, we recognized the entire $1.5 million in rental income through March 31, 2013. Flight Equipment Marketing and Gain on Aircraft Sales: Flight equipment marketing and gain on aircraft sales increased to $50.6 million for the three months ended March 31, 2014, compared to $2.3 million for the same period in 2013, primarily due to larger gains recorded on the aircraft sold during the three months ended March 31, 2014, as compared to the gains recorded on the aircraft sold for the same period in 2013. The amount of the gain depends on the type and age of, and demand for, flight equipment marketed in each period. Other Income: Other income decreased to $37.1 million for the three months ended March 31, 2014, compared to $44.8 million for the same period in 2013, due to a $20.0 million decrease primarily from early termination fees. This decrease was partially offset by (i) a $9.5 million increase in revenue recognized by AeroTurbine, net of cost of sales, from the sale of engines, airframes, parts and supplies; and (ii) other minor fluctuations aggregating an increase of $2.8 million. Interest Expense: Interest expense decreased to $333.6 million for the three months ended March 31, 2014, compared to $384.1 million for the same period in 2013. Our average debt outstanding, net of deferred debt discount, decreased to $22.1 billion during the three months ended March 31, 2014, compared to $24.2 billion during the same period in 2013, and our weighted average effective cost of borrowing, which excludes the effect of amortization of deferred debt issue costs, decreased 0.19%.



Depreciation: Depreciation of flight equipment decreased 2.6% to $452.0 million for the three months ended March 31, 2014, compared to $464.1 million for the same period in 2013, primarily due to aircraft disposals and the conversion of certain aircraft under operating leases to sales-type leases.

Aircraft Impairment Charges on Flight Equipment Held for Use: We did not record any aircraft impairment charges on flight equipment held for use for the three months ended March 31, 2014. We recorded $19.7 million of aircraft impairment charges for two aircraft for the three months ended March 31, 2013. See Note G of Notes to Condensed, Consolidated Financial Statements Aircraft Impairment Charges and Fair Value Adjustments on Flight Equipment Sold or to be Disposed: During the three months ended March 31, 2014 and 2013, respectively, we recorded the following aircraft 47



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impairment charges and fair value adjustments on flight equipment sold or to be disposed (See Note H of Notes to Condensed, Consolidated Financial Statements): Three Months Ended March 31, 2014 March 31, 2013 Impairment Impairment Aircraft Charges and Aircraft Charges and Impaired or Fair Value Impaired or Fair Value Adjusted Adjustments Adjusted Adjustments (Dollars in millions) Loss Impairment charges and fair value adjustments on aircraft likely to be sold or sold (including sales-type leases) 2 $ 20.9 2 $ 9.5 Impairment charges on aircraft intended to be or designated for part-out 7 21.3 (a) 8 17.0 (a) Total Impairment charges and fair value adjustments on flight equipment sold or to be disposed 9 $ 42.2 10 $ 26.5



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(a)

Includes charges relating to two engines for the three months ended

March 31, 2014 and one engine for the three months ended March 31, 2013.

Aircraft Costs: Aircraft costs increased to $24.9 million for the three months ended March 31, 2014, compared to $13.6 million for the same period in 2013 primarily due to an increase in repair costs on aircraft returned early. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased to $90.6 million for the three months ended March 31, 2014, compared to $77.4 million for the same period in 2013 due to a $13.2 million increase in salaries and employee related expenses, primarily due to a $19.8 million accrual for incentive bonuses and other personnel costs associated with our separation from AIG, offset by a reduction in other personnel costs aggregating $6.6 million. Other Expenses: Other expenses decreased to $1.0 million for the three months ended March 31, 2014, compared to $8.2 million for the same period in 2013 primarily due to (i) no provisions for asset value guarantees recorded for the three months ended March 31, 2014, as compared to a $6.6 million provision recorded for asset value guarantees associated with two aircraft for the same period in 2013; and (ii) a net decrease of $0.6 million in other expense categories. Provision for Income Taxes: Our effective tax rate for the three months ended March 31, 2014 was 35.4%, as compared to 23.4% for the same period in 2013. Our effective tax rate for the three months ended March 31, 2014 was impacted by minor permanent items and interest accrued on uncertain tax positions and IRS audit adjustments. Our effective tax rate for the three months ended March 31, 2013 was impacted by an $8.8 million interest refund allocation from AIG related to IRS audit adjustments, which had a beneficial impact to our effective tax rate and was discretely recorded for the three months ended March 31, 2013. Our reserve for uncertain tax positions increased by $25.4 million for the three months ended March 31, 2014, the benefits of which, if realized, would have a significant impact on our effective tax rate.



Other Comprehensive Income (Loss): Other comprehensive income was relatively unchanged at $2.0 million for the three months ended March 31, 2014, compared to $2.5 million for the same period in 2013.

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Liquidity

We generally fund our operations, which primarily consist of aircraft purchases, debt principal and interest payments, and operating expenses, through a variety of sources. These sources include available cash balances, internally generated funds, including lease rental payments and proceeds from aircraft sales and part-outs, and debt issuance proceeds. In addition to these sources of funds, we have $2.3 billion available under our unsecured revolving credit facility. As part of our liquidity management strategy, we strive to maintain, and believe we currently have, sufficient liquidity to cover our debt maturities over the next 18 to 24 months and our capital expenditures over the next 12 months. We also target a ratio of adjusted net debt to adjusted shareholders' equity between 2.5-to-1.0 and 3.0-to-1.0, and our ratio was 2.5-to-1.0 at March 31, 2014. Adjusted net debt to adjusted shareholders' equity is a non-GAAP financial measure; see Non-GAAP Financial Measurements for a reconciliation of non-GAAP financial measures to their most directly comparable GAAP measures. We are also focused on aligning our operating cash flows with the principal obligations due on our debt on an annual basis and the weighted average maturities on our debt financing was 6.2 years as of March 31, 2014. We have also continued to diversify our funding sources to include both secured and unsecured financings from public debt markets, commercial banks and institutional loan markets, among others.



During the three months ended March 31, 2014, we generated cash flows from operations of approximately $0.6 billion and we raised approximately $1.5 billion of net proceeds from the issuance of secured financings.

At March 31, 2014, we had approximately $2.3 billion in cash and cash equivalents available for use in our operations. We also had $1.1 billion of cash restricted from general use in our operations, $685.5 million of which is associated with our 2014 Secured Term Loan. We can use the remaining cash to satisfy certain obligations under our operating leases and to pay principal and interest primarily on our 2004 ECA facility. At April 25, 2014, we had the entire $2.3 billion available to us under our revolving credit facility and approximately $64.5 million of the $430.0 million was available under AeroTurbine's credit facility. We also have the potential ability to increase the AeroTurbine credit facility by an additional $70 million either by adding new lenders or allowing existing lenders to increase their commitments if they choose to do so. Our bank credit facilities and indentures 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, and such limit currently totals approximately $9.7 billion. This limitation is subject to certain exceptions, including the ability to incur secured indebtedness to finance the purchase of aircraft. As of April 25, 2014, we were able to incur an additional $5.9 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 such indentures. In addition to addressing our liquidity needs through debt financings, we may also pursue potential aircraft sales and part-outs. During the three months ended March 31, 2014, we sold two aircraft for approximately $97.5 million in aggregate gross proceeds in connection with our ongoing fleet management strategy. As of April 25, 2014, we had sold two additional aircraft and we currently anticipate sales of additional aircraft during the remainder of the year. In evaluating potential sales or part-outs of aircraft, we balance maximization of cash today with the long-term value of holding aircraft. On December 16, 2013, AIG entered into an agreement with AerCap and AerCap Ireland Limited, a wholly-owned subsidiary of AerCap, for the sale of 100 percent of our common stock for consideration consisting of $3.0 billion in cash, a portion of which will be funded by a special distribution of $600.0 million to be paid by us to AIG upon consummation of the transaction, and approximately 49



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97.6 million newly-issued AerCap common shares. The consideration has a value of approximately $5.4 billion based on AerCap's pre-announcement closing price per share of $24.93 on December 13, 2013. The transaction is subject to required regulatory approvals, including all applicable regulatory reviews and approvals, as well as other customary closing conditions. The transaction was approved by AerCap shareholders on February 13, 2014 and is expected to close in the second quarter of 2014. In connection with the financing of the transaction, AerCap has entered into a $2.75 billion bridge credit agreement. At the closing of the transaction, we and certain of our subsidiaries will become guarantors of the facility. Additionally, AIG has entered into a credit agreement for a five-year senior unsecured revolving credit facility between AerCap Ireland as borrower and AIG as lender. The revolving credit facility provides for an aggregate commitment of $1 billion and permits loans for general corporate purposes after the closing of the transaction. We will become a guarantor of the facility after the closing of the transaction. AerCap has notified us that, immediately after the closing of our sale to AerCap, it intends to transfer our assets substantially as an entirety to AGAT, a wholly-owned subsidiary of AerCap, and AGAT will assume substantially all of our liabilities in connection with the transfer. We have recently entered into amendments to certain of our debt agreements that will become effective upon the effectiveness of the Reorganization, in order to reflect the Reorganization and to provide substantially the same level of credit support after the Reorganization as the holders of ILFC debt currently receive. In addition, upon the effectiveness of the Reorganization, AGAT will become the successor obligor of the secured and unsecured bonds issued under our indentures, including the bonds issued under our shelf registration statements filed with the SEC. 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 18 to 24 months and to cover our capital expenditures for at least the next 12 months.



Debt Financings

We borrow funds on both a secured and unsecured basis from various sources, including public debt markets, commercial banks and institutional loan markets. Significant capital resources and liquidity developments for the three months ended March 31, 2014 include the issuance of a $1.5 billion secured term loan maturing on March 6, 2021, bearing interest at LIBOR plus a margin of 2.75% with a 0.75% LIBOR floor. 50



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Table of Contents Our debt financing was comprised of the following: March 31, December 31, 2014 2013 (Dollars in thousands) Secured Senior secured bonds $ 3,900,000$ 3,900,000 ECA and Ex-Im financings 1,602,084 1,746,144 Secured bank debt(a) 1,754,096 1,811,705 Institutional secured term loans 2,250,000 750,000 Less: Deferred debt discount (12,154 ) (5,058 ) 9,494,026 8,202,791 Unsecured Bonds and medium-term notes 12,268,109 12,269,522 Less: Deferred debt discount (29,258 ) (31,456 ) 12,238,851 12,238,066 Total Senior Debt Financings 21,732,877 20,440,857 Subordinated Debt 1,000,000 1,000,000 $ 22,732,877$ 21,440,857



Selected interest rates and ratios which include the economic effect of derivative instruments: Weighted average effective cost of borrowing(b)

5.79 % 5.94 % Percentage of total debt at fixed rates 73.79 %



78.64 % Weighted average effective cost of borrowing on fixed rate debt(b)

6.74 %



6.74 %

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(a)

Of this amount, $169.0 million (2014) and $173.5 million (2013) is

non-recourse to ILFC. These secured financings were incurred by VIEs and

consolidated into our Condensed, Consolidated Financial Statements. (b) Excludes the effect of amortization of deferred debt issue cost.



The following table presents information regarding the collateral pledged for our secured debt as of March 31, 2014:

March 31, 2014 Debt Net Book Value Number of Outstanding of Collateral Aircraft (Dollars in thousands) Senior secured bonds $ 3,900,000$ 5,776,134 174 ECA and Ex-Im Financings 1,602,084 4,867,365 117 Secured bank debt(a) 1,754,096 2,546,808 61 (a) Institutional secured term loans 2,250,000 4,111,978 136 (b) Total $ 9,506,180$ 17,302,285 488



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(a)

Amounts represent the net book value and number of aircraft securing ILFC

secured bank term debt and do not include the book value or number of AeroTurbine assets securing the AeroTurbine revolving credit facility, under which $365.5 million is included in the total debt outstanding. (b) Includes SPEs owning 85 aircraft approved as collateral for our 2014

Secured Term Loan, of which, on the closing date we had transferred the equity in SPEs owning 43 aircraft into the structure. 51



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Our debt agreements contain various affirmative and restrictive covenants. See Note J of Notes to Condensed, Consolidated Financial Statements for a description of each financing arrangement. As of March 31, 2014, we were in compliance with the covenants in our debt agreements.

Derivatives

From time to time, we may employ a variety of derivative products to manage our exposure to interest rate 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 March 31, 2014, our derivative portfolio consisted of interest rate swaps. All of our interest rate swap agreements have been designated as and accounted for as cash flow hedges. We did not designate our interest rate cap agreements as hedges when they were outstanding. When interest rate and foreign currency swaps are effective as cash flow hedges, they offset the variability of expected future cash flows, both economically and for financial reporting purposes. We have historically used such instruments to effectively mitigate foreign currency and interest rate risks. The effect of our ability to apply hedge accounting for the swap agreements is that changes in their fair values are recorded in OCI instead of in earnings for each reporting period when they were outstanding. As a result, reported net income will not be directly influenced by changes in interest rates. The counterparty to all our interest rate swaps at March 31, 2014 is AIG Markets, Inc., a wholly-owned subsidiary of AIG. 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 not have a material impact on our results of operations and cash flows, as all of our derivatives were in a liability position at March 31, 2014.



Credit Ratings

While a ratings downgrade does not result in a default under any of our debt agreements, it could adversely affect our ability to issue 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 by Fitch, Moody's and S&P, the nationally recognized rating agencies:

Unsecured Debt Ratings

Senior Unsecured Corporate Date of Last Rating Agency Debt Rating Rating Outlook/Watch Ratings Action Fitch BB BB Rating Watch Positive December 16, 2013 Moody's Ba3 Ba3 Negative Outlook January 17, 2014 S&P BBB- BBB- CreditWatch Negative December 16, 2013 Secured Debt Ratings

$750 Million$1.5 Billion$3.9 Billion Rating Agency 2012 Term Loan 2014 Term Loan Senior Secured Notes Fitch BB BB BBB- Moody's Ba2 Ba2 Ba2 S&P BBB- BBB- BBB- These credit ratings are the current opinions of the rating agencies and they may be changed, suspended or withdrawn at any time by the rating agencies as a result of various circumstances. 52



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Existing Commitments

The following table summarizes our contractual obligations at March 31, 2014: Commitments Due by Fiscal Year Total 2014 2015 2016 2017 2018 Thereafter (Dollars in thousands) Bonds and medium-term notes $ 12,268,109$ 1,038,089$ 2,010,020$ 1,550,000$ 2,000,000$ 770,000$ 4,900,000 Senior secured bonds 3,900,000 1,350,000 - 1,275,000 - 1,275,000 - Secured bank loans(a) 1,754,096 128,148 537,157 172,566 173,537 742,688 - ECA and Ex-Im financings 1,602,084 303,969 359,960 282,492 226,188 192,448 237,027 Other secured financings 2,250,000 - - - 750,000 - 1,500,000 Subordinated debt 1,000,000 - - - - - 1,000,000 Estimated interest payments including the effect of derivative instruments(b) 7,685,298 899,963 1,126,387 932,540 721,714 558,139 3,446,555 Operating leases(c) 53,463 11,162 11,463 4,390 3,645 3,309 19,494 Pension obligations(d) 6,476 999 1,066 1,105 1,153 1,105 1,048 Commitments under ILFC aircraft purchase agreements(e) 20,717,583 1,726,971 2,579,296 3,084,150 4,460,045 4,318,343 4,548,778 Commitments under AeroTurbine flight equipment purchase agreements 31,250 31,250 - - - - - Total $ 51,268,359$ 5,490,551$ 6,625,349$ 7,302,243 $

8,336,282 $ 7,861,032$ 15,652,902



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(a)

Includes $365.5 million outstanding under AeroTurbine's revolving credit

facility.

(b)

Estimated interest payments for floating rate debt included in this table

are based on rates at March 31, 2014. Estimated interest payments include

the estimated impact of our interest rate swap agreements. For floating

rate debt that has been swapped into fixed rate debt, the estimated interest payments reflect the swapped fixed rate. (c)



Consists primarily of office buildings under lease. Minimum rentals have

not been reduced by minimum sublease rentals of $1.5 million receivable in

the future under non-cancellable subleases. (d) 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 "2014" consists of total estimated allocations for

2014 and the column "Thereafter" consists of the 2019 estimated allocation.

The amount allocated has not been material to date.

(e)

Includes sale-leaseback transactions in 2014 and 2015 and commitments to

purchase 13 new spare engines.

Contingent Commitments

From time to time, we have previously participated with airlines, banks and other financial institutions in the financing of aircraft by providing aircraft asset value guarantees. As a result, if we are called upon to fulfill our obligations, we have recourse to the value of the underlying aircraft. The table below reflects our potential payments for these contingent obligations, without any offset for the projected value of the aircraft. Contingency Expiration by Fiscal Year Total 2014 2015 2016 2017 2018 Thereafter (Dollars in thousands) Asset Value Guarantees $ 285,565 (a) $ - $ 112,132 $ - $ 46,140$ 31,000$ 96,293



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(a) Amount includes three guarantees that had been exercised, of which we intend to purchase at least one aircraft in 2015.



The table above does not include $834.4 million of unrecognized tax benefits, consisting primarily of FSC and ETI benefits, and any effect of our net tax liabilities, the timing of which is uncertain.

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Non-GAAP Financial Measurements

Adjusted net debt and adjusted shareholders' equity are not defined under GAAP, and may not be comparable to similarly titled measures reported by other companies. Investors should consider adjusted net debt and adjusted shareholders' equity in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We have presented these measures of financial leverage because it is the way we present our leverage to investors and because it aligns, in part, with definitions under certain of our debt covenants. Adjusted net debt means our total debt, net of deferred debt discount, less cash and cash equivalents, excluding restricted cash, and less a 50% equity credit for our $1.0 billion outstanding in hybrid instruments, as of March 31, 2014. Adjusted shareholders' equity means our total shareholders' equity less AOCI, and including a 50% equity credit for our $1.0 billion outstanding in hybrid instruments. AOCI, which principally reflects aggregate changes in the market value of our cash flow hedges, has been excluded from adjusted shareholders' equity because it is excluded from shareholders' equity in determining compliance with our debt covenants. Total debt has been adjusted by cash and cash equivalents, excluding restricted cash, to better evaluate our financial condition and our future obligations that would not be readily satisfied by cash and cash equivalents on hand. Total debt and shareholders' equity are adjusted by a 50% equity credit for our $1.0 billion outstanding in hybrid instruments to reflect the equity nature of that financing arrangement and to provide information in line with our debt covenant calculations.



The following table reconciles adjusted net debt to the most directly comparable GAAP measure, total debt:

As of March 31, 2014 (Dollars in thousands)



Total debt, net of deferred debt discount, including current portion

$



22,732,877

Less: Cash and cash equivalents, excluding restricted cash

2,317,203

Less: 50% equity credit for $1.0 billion in hybrid instruments 500,000 Adjusted net debt $ 19,915,674



The following table reconciles adjusted shareholder's equity to the most directly comparable GAAP measure, total shareholder's equity:

As of March 31, 2014 (Dollars in thousands) Total shareholders' equity $ 7,568,929 Less: Accumulated other comprehensive loss



(2,222 ) Plus: 50% equity credit for $1.0 billion in hybrid instruments

500,000

Adjusted shareholders' equity $ 8,071,151 Variable Interest Entities Our leasing and financing activities require us to use many forms of SPEs to achieve our business objectives and we have participated to varying degrees in the design and formation of these SPEs. The 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 a variable 54



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interest in other entities in which we have determined that we are the PB, because we control and manage all aspects of the entities, including directing the activities that most significantly affect these entities' economic performance, and we absorb the majority of the risks and rewards of these entities. We consolidate these entities into our Condensed, Consolidated Financial Statements and the related aircraft are included in Flight equipment and the related borrowings are included in Secured debt financings on our Condensed, Consolidated Balance Sheets. We have variable interests in the following entities in which we have determined we are not the PB because we do not have the power to direct the activities that most significantly affect the entity's economic performance: (i) one entity that we have previously sold aircraft to and for which we manage the aircraft, in which our variable interest consists of the servicing fee we receive for the management of those aircraft; and (ii) two affiliated entities we sold aircraft to in 2003 and 2004, which aircraft we continue to manage, in which our variable interests consist of the servicing fee we receive for the management of those aircraft. These two affiliated entities are consolidated into AIG's financial statements.



Off-Balance Sheet Arrangements

We have not established any unconsolidated entities for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We have, however, from time to time established subsidiaries, entered into joint ventures or created other partnership arrangements or trusts with the limited purpose of leasing aircraft or facilitating borrowing arrangements. See Note M of Notes to Condensed, Consolidated Financial Statements for more information regarding our involvement with VIEs. 55



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Source: Edgar Glimpses