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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
ANNUAL REPORT
 
 
(Mark One)
     x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
OR
 
     o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
Commission file number 001-31616
 
INTERNATIONAL LEASE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
 
     
California
  22-3059110
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
10250 Constellation Blvd., Suite 3400
Los Angeles, California
(Address of principal executive offices)
  90067
(Zip Code)
 
Registrant’s telephone number, including area code: (310) 788-1999
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
 
6.625% Notes due November 15, 2013
  New York Stock Exchange
 
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 registrant’s 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
     
Large accelerated filer o
  Accelerated filer o
Non-accelerated filer x
  Smaller reporting company o
(Do not check if a smaller reporting company)
   
 
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, 2009 and February 26, 2010, 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
 
2009 FORM 10-K ANNUAL REPORT
 
 
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Table of Contents

 
PART I
 
Item 1.  Business
 
General
 
International Lease Finance Corporation’s (the “Company,” “ILFC,” “management,” “we,” “our,” “us”) primary business operation has historically been to acquire new commercial jet aircraft from The Boeing Company (“Boeing”) and Airbus S.A.S. (“Airbus”) and lease those aircraft to airlines throughout the world. Until we have addressed our current financial position, we will likely not pursue any new aircraft purchases over and above our current contracted deliveries. We will continue to lease our existing fleet and 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 and remarket and sell aircraft owned by others for a fee. 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, 2009, we owned 993 jet aircraft, had 11 additional aircraft in the fleet classified as finance and sales-type leases and provided fleet management services for 99 aircraft. See “Item 2. Properties — Flight Equipment.” At December 31, 2009, we had contracted with Boeing and Airbus to purchase 120 new aircraft, all negotiated in U.S. dollars, for delivery through 2019 with an estimated purchase price of $13.7 billion. See “Item 2. Properties — Commitments.
 
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. To date, we have been able to purchase aircraft on terms which have permitted us to lease our aircraft portfolio at a profit.
 
We have generally financed our aircraft purchases through available cash balances, internally generated funds and debt financings. A combination of the challenges facing our parent, American International Group, Inc. (“AIG”), the downgrades in our credit ratings by the rating agencies, and the turmoil in the credit markets has severely limited our ability to access the commercial paper and unsecured debt markets.
 
  •  During 2009, we entered into two credit agreements aggregating $3.9 billion with AIG Funding, Inc., a subsidiary of our parent (“AIG Funding”), secured by a portfolio of aircraft and other assets related to the pledged aircraft.
 
  •  We guaranteed the repayment of AIG’s obligations under its revolving credit facility and guarantee and pledge agreement with the Federal Reserve Bank of New York (“FRBNY”), as amended, (the “FRBNY Credit Agreement”) up to an amount equal to the aggregate outstanding balance of the loans from AIG Funding.
 
  •  We are currently seeking secured financings from third parties.
 
  •  We are currently exploring sales of portfolios of aircraft; the potential impairment or realized loss could be material to our results of operations for an individual period.
 
  •  We may need to seek additional funding from AIG, which funding would be subject to the consent of the FRBNY; AIG intends to provide support to us through February 28, 2011, to the extent that secured financing, aircraft sales and other sources of funds are not sufficient to meet liquidity needs.
 
  •  Without additional support from AIG or if we fail to obtain secured financing from a third party lender, in the future there could exist doubt concerning our ability to continue as a going concern.
 
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consideration of ILFC’s Ability to Continue as a Going Concern.”
 
The airline industry is cyclical, economically sensitive and highly competitive. Our continued success is largely dependent on management’s ability to develop customer relationships for leasing, sales, remarketing and


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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. AIG’s 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. Since September 2008, AIG has been working to protect and enhance the value of its key businesses, execute an orderly asset disposition plan, and position itself for the future. AIG has entered into several important transactions and relationships with the FRBNY, the AIG Credit Facility Trust, and the United States Department of Treasury. As a result of these arrangements, AIG is controlled by the AIG Credit Facility Trust, which was established for the sole benefit of the United States Treasury. AIG is exploring alternative restructuring opportunities for ILFC. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations — Our Relationship with AIG.
 
Recent Developments
 
On February 5, 2010, Steven F. Udvar-Hazy retired as a director and our Chief Executive Officer and John L. Plueger, our President and Chief Operating Officer, was named Acting Chief Executive Officer. Additionally, Julie I. Sackman, our Executive Vice President, General Counsel and Secretary, has informed us that she will retire effective May 1, 2010. Brian M. Monkarsh, formerly Vice President and Corporate Counsel, has been named Senior Vice President and Assistant General Counsel.
 
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”), rentals are reported ratably as revenue over the lease term, as they are earned. The aircraft under operating leases are included as Flight equipment under operating leases on our Consolidated Balance Sheets and are depreciated to an estimated salvage 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 record lease payments received as a reduction in the net investment in the finance/sales-type leases and interest income using an interest rate implicit in the lease. At December 31, 2009, we accounted for 993 aircraft as operating leases and 11 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. Such rentals are included in the caption


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Rental of flight equipment in our Consolidated Statements of Income. We provide a charge to operations based on the estimated reimbursements during the life of the lease. This amount is included in Provision for overhauls in our Consolidated Statements of Income.
 
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 lessee’s 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 return of the aircraft. 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 leases that were in effect at March 11, 2005 through February 2010. The economic risk arising from foreign currency denominated leases has, to date, been immaterial to us.
 
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 parties.
 
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 lessee’s jurisdiction. In the majority of these situations, we have obtained the lessee’s 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 2009, three of our lessees filed for bankruptcy protection or ceased operations. These customers operated nine of our aircraft. As of February 25, 2010, eight of these aircraft were leased to other airlines and one of these aircraft is still available for lease. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations — Overview — Aircraft Industry.
 
Flight Equipment Marketing
 
We may sell our leased aircraft at or before the expiration of their leases. The buyers of our aircraft include the aircraft’s 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 or loss on disposition of leased aircraft is included in the caption Flight equipment marketing in our Consolidated Statements of Income.


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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 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 operation. 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 Income.
 
Financing/Source of Funds
 
We purchase new aircraft directly from manufacturers and used aircraft from airlines and other owners. In the past we have financed the purchase price of flight equipment using internally generated funds and debt financings. Since September 2008, a combination of the challenges facing our parent, AIG, the downgrades in our credit ratings by the rating agencies, and the turmoil in the credit markets has eliminated our ability to access the commercial paper market and limited our ability to issue unsecured debt. Until we have addressed our current financial position, we will likely not pursue any new aircraft purchases over and above our current contracted deliveries. We are currently seeking secured financing to meet our future liquidity needs. We may also need to seek additional funding from AIG, which funding would be subject to the consent of the FRBNY. Without additional support from AIG or if we fail to obtain secured financing from a third party lender, in the future there could exist doubt concerning our ability to continue as a going concern. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consideration of ILFC’s Ability to Continue as a Going Concern.”
 
Customers
 
At December 31, 2009, 2008 and 2007, we leased aircraft to customers in the following regions:
 
                                                 
    Customers by Region
       
    2009     2008     2007  
    Number
          Number
          Number
       
    of
          of
          of
       
Region
  Customers (a)     %     Customers (a)     %     Customers (a)     %  
Europe
    80       44.9 %     84       48.3 %     82       48.0 %
Asia and the Pacific
    45       25.3       41       23.5       38       22.2  
The Middle East and Africa
    24       13.5       19       10.9       16       9.4  
U.S. and Canada
    18       10.1       17       9.8       25       14.6  
Central and South America and Mexico
    11       6.2       13       7.5       10       5.8  
                                                 
      178       100.0 %     174       100 %     171       100 %
                                                 
 
  (a)  A customer is an airline with its own operating certificate.
 
Revenues include rentals of flight equipment to foreign airlines of $4,925,001,000 in 2009, $4,612,019,000 in 2008, and $4,175,987,000 in 2007, comprising 93.4%, 93.4%, and 91.0%, respectively, of total Rentals of flight equipment revenue. See Note J of Notes to Consolidated Financial Statements.


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The following table sets forth the dollar amount and percentage of total rental revenues attributable to the indicated geographic areas based on each airline’s principal place of business for the years indicated:
 
                                                 
    2009     2008     2007  
    Amount     %     Amount     %     Amount     %  
    (Dollars in thousands)  
 
Europe
  $ 2,353,979       44.6 %   $ 2,241,742       45.3 %   $ 2,060,196       44.9 %
Asia and the Pacific
    1,583,389       30.0       1,432,252       29.0       1,229,141       26.8  
The Middle East and Africa
    638,747       12.1       558,553       11.3       528,095       11.5  
U.S. and Canada
    453,976       8.6       444,921       9.0       536,313       11.7  
Central and South America and Mexico
    245,128       4.7       265,980       5.4       233,866       5.1  
                                                 
    $ 5,275,219       100 %   $ 4,943,448       100 %   $ 4,587,611       100 %
                                                 
 
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 airline’s principal place of business for the years indicated:
 
                                                 
    2009     2008     2007  
    Amount     %     Amount     %     Amount     %  
    (Dollars in thousands)  
 
China
  $ 903,361       17.1 %   $ 835,722       16.9 %   $ 714,181       15.6 %
France
    537,698       10.2       515,165       10.4       448,538       9.8  
 
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 market place 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 its regulations, the DOC and the U.S. 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.


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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.
 
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.
 
As an indirect wholly-owned subsidiary of AIG, we are subject to examination and review by the U.S. Department of the Treasury’s Office of Thrift Supervision (“OTS”). In 1999, AIG became a unitary thrift holding company within the meaning of the Home Owners’ Loan Act when the OTS granted AIG approval to organize AIG Federal Savings Bank. AIG is subject to OTS regulation, examination, supervision and reporting requirements. In addition, the OTS has enforcement authority over AIG and its subsidiaries. Among other things, this permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of AIG’s subsidiary savings association, AIG Federal Savings Bank.
 
Employees
 
We operate in a capital intensive rather than a labor intensive business. As of December 31, 2009, we had 180 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 Troubled Asset Relief Program (“TARP”) funds and the Office of the Special Master for TARP Executive Compensation (“Special Master”) has imposed limitations on compensation of AIG’s highest paid employees, including our Acting Chief Executive Officer and our Chief Financial Officer (the “Principal Officers”). If the limitations on compensation created by the Special Master are not agreeable to the Principal Officers, we may not be able to retain them, which may negatively impact our ability to conduct business. See “Item 1A. Risk Factors.”
 
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 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 in U.S. dollars, which are shown 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 lessee’s 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.


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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 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 operator’s 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.
 
In late 2005, the international aviation insurance market unilaterally introduced exclusions for physical damage to aircraft hulls caused by dirty bombs, bio-hazardous materials and electromagnetic pulsing. Exclusions for the same type of perils could be introduced into liability policies.
 
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 AIG’s 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 AIG’s 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 contains or incorporates 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 the industry, expressed or implied in such forward-looking statements. Such factors include, among others, general economic, business and industry 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.
 
Item 1A.  Risk Factors
 
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. As a result, should certain of these risks emerge, we may need additional support from AIG or additional secured financing. Without additional support from AIG or if we fail to obtain secured financing from a third party lender, in the future there could exist doubt concerning our ability to continue as a going concern. The numerous risks and


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uncertainties to which our business is subject are described below and in the section titled “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
 
Liquidity Risk
 
We have historically depended on our access to the public debt markets and bank loans in addition to our operating cash flows, to finance the purchase of aircraft and repay our maturing debt obligations. Due to a combination of the challenges facing AIG, the downgrades in our credit ratings by the rating agencies, and the turmoil in the credit markets, we have been unable to access the commercial paper market since the third quarter of 2008, we currently have limited access to the unsecured debt markets, and the maximum amount available under our senior revolving credit facilities is outstanding.
 
We cannot determine if the commercial paper market will be available to us again, or when we will be able to access the unsecured debt markets. We are therefore currently seeking other ways to fund our purchase commitments of aircraft and future maturing debt obligations, including through secured financings and additional support from AIG. During 2009, we entered into two credit agreements aggregating $3.9 billion with AIG Funding to assist in funding our liquidity needs, including the repayment of our obligations under our $2.0 billion revolving credit agreement that matured on October 15, 2009. The credit agreements are secured by a portfolio of aircraft and other assets related to the pledged aircraft. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt Financings” for additional information on these credit agreements. We also increased the total amount available under our 2004 Export Credit Agency (“ECA”) facility by $1.0 billion in May 2009 and at February 25, 2010, we had approximately $682 million available under that facility to use for purchases of new Airbus aircraft through June 2010, provided we receive consent from the security trustee, as required with our current long-term debt ratings. In addition, we entered into secured financings with respect to two aircraft during the second quarter of 2009.
 
Under our existing public debt indentures and bank loans, we and our subsidiaries are permitted to incur secured indebtedness totaling up to 12.5% of consolidated net tangible assets, as defined in such debt agreements, which is currently approximately $4.7 billion. Therefore, we can currently incur additional secured financings totaling approximately $800 million under these existing debt agreements, provided we receive any required consents from the FRBNY. Furthermore, it may be possible, subject to receipt of required consents from AIG Funding, the FRBNY, and the lenders under our bank loans, for us to obtain secured financing without regard to the 12.5% consolidated net tangible asset limit referred to above (but subject to certain other limitations) by doing so through subsidiaries that qualify as non-restricted subsidiaries under our public debt indentures. We will need to seek relief from our bank lenders with regard to the 12.5% limitation. We cannot predict whether the banks, AIG Funding, or the FRBNY will consent to us incurring additional secured debt.
 
Because of the poor condition of current credit markets and AIG’s announced plans to continue to explore alternative restructuring opportunities for us, we may not be able to obtain secured financing from third parties on favorable terms, if at all. We may need to seek additional funding from AIG, which funding would be subject to the consent of the FRBNY. We cannot predict whether AIG can obtain the FRBNY’s consent to allow AIG to provide additional support to us.
 
We are also pursuing potential aircraft sales, which could aggregate up to $3.5 billion in proceeds. Proposed portfolios have been presented to potential buyers; some bids have been received and are being evaluated. In evaluating the bids we are balancing 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 for any such portfolio, and whether we can reach an agreement with terms acceptable to the buyers and us. Furthermore, if an agreement is reached, the transaction would have to be approved by the FRBNY. Therefore, we cannot predict whether a sale of aircraft will occur.
 
Because the current market for aircraft is depressed due to the economic downturn and limited availability of buyer financing, a 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 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.


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If we are unable to raise sufficient cash from these strategies, 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 unsecured financing, credit ratings also directly impact 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. These credit rating downgrades, combined with externally generated volatility, have limited our ability to access unsecured debt markets and resulted in unattractive funding costs in the private debt markets.
 
Additionally, our current long-term debt ratings impose the following restrictions under the 1999 and 2004 ECA facilities: (i) we must receive written consent from the security trustee before we can fund Airbus aircraft deliveries under the 2004 ECA facility; (ii) we must segregate all security deposits, maintenance reserves, and rental payments received under the leases of the aircraft financed under the 1999 and 2004 ECA facilities into separate accounts controlled by the security trustees (segregated rental payments will be used to pay principal and interest on the outstanding debt); and (iii) we must file individual mortgages on the aircraft funded under the 1999 and 2004 ECA facilities in the local jurisdictions in which the respective lessees operate. At December 31, 2009, we had segregated security deposits, maintenance reserves and rental payments aggregating approximately $315 million related to aircraft funded under the 1999 and 2004 ECA facilities.
 
We do not anticipate improvement in our credit ratings until there is clarity related to our ownership structure. Further ratings downgrades could increase our borrowing costs and further limit our access to the unsecured debt markets.
 
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 matching debt maturities with lease maturities.
 
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 parent’s risk of default, or in a market sector’s risk of default all have an impact on our cost of funds.
 
As mentioned above, we are currently limited to secured financings, which will increase our future cost of funds and negatively affect future earnings. A one percent increase in our composite interest rate at December 31, 2009 would have increased our interest expense by approximately $300 million annually, which would put downward pressure on our operating margins.
 
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. We can give no assurance how further changes in circumstances related to AIG would impact us.
 
Restrictive Covenants on Our Operations — AIG experienced liquidity issues beginning in the third quarter of 2008 and has, among its several important transactions and relationships with the FRBNY, entered into the FRBNY Credit Agreement, which includes financial and other restrictive covenants. As a subsidiary of AIG, we are subject to the covenants under the FRBNY Credit Agreement. Additionally, during the fourth quarter of 2009, we entered


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into two credit agreements with AIG Funding that also contain restrictive covenants. The covenants in these credit agreements restrict, among other things, our ability to:
 
  •  incur debt;
 
  •  encumber our assets;
 
  •  dispose of certain assets;
 
  •  enter into sale-leaseback transactions;
 
  •  make equity or debt investments in other parties;
 
  •  make capital expenditures; and
 
  •  pay dividends and distributions.
 
These covenants may affect our ability to operate and finance our business as we deem appropriate.
 
AIG as Our Counterparty of Derivatives — AIG Financial Products Corp. (“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.
 
AIG Going Concern Consideration — In connection with the preparation of its annual report on Form 10-K for the year ended December 31, 2009, AIG management assessed whether AIG has the ability to continue as a going concern. After considering several factors as outlined in AIG’s Form 10-K filed on February 26, 2010, AIG’s management believes that it will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months. In connection with making their going concern assessment and conclusion, AIG management and the Board of AIG have confirmed that “as first stated by the U.S. Treasury and the Federal Reserve in connection with the announcement of the AIG Restructuring Plan on March 2, 2009, the U.S Government remains committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due.” It is possible that the actual outcome of one or more of AIG’s plans could be materially different or that one or more of its significant judgments or estimates could prove to be materially incorrect. If one or more of these possible outcomes are realized, AIG may need additional U.S. government support to meet its obligations as they come due. If AIG is not able to meet its obligations as they come due, it will have a significant impact on our operations, including limiting our ability to issue new debt and to receive additional support from AIG.
 
Key Personnel Risk
 
Our senior management’s reputation and relationships with lessees and sellers of aircraft are a critical element of our business. The reduction in AIG’s common stock price has dramatically reduced the value of equity awards previously made to our key employees. Furthermore, the American Recovery and Reinvestment Act of 2009 contains restrictions on bonus and other incentive compensation payable to the five executives named in a company’s proxy statement and the next 20 highest paid employees of companies receiving TARP funds. Pursuant to the Recovery Act, the Special Master issued a Determination Memorandum with respect to AIG’s named executive officers (except for the Chief Executive Officer) and 20 highest paid employees, and reviewed AIG’s compensation arrangements for its next 75 most highly compensated employees and issued a Determination Memorandum on their compensation structures, which placed significant new restrictions on their compensation as well. Our Acting Chief Executive Officer and Chief Financial Officer are among the 25 highest paid employees who are subject to these restrictions. Historically, we have embraced a pay-for-performance philosophy. Based on the limitations placed on incentive compensation by the Determination Memoranda issued by the Special Master, it is unclear whether, for the foreseeable future, we will be able to create a compensation structure that permits us to retain and motivate our most senior and most highly compensated employees and other high performing employees who become subject to the purview of the Special Master. We also stand the risk of our key employees exploring other career opportunities due to the upheaval at AIG and related uncertainties of the future of ILFC. On February 5, 2010, Steven F. Udvar-Hazy retired as a director and our Chief Executive Officer, and Julie I. Sackman, our Executive Vice President, General Counsel and Secretary, has informed us that she will retire effective May 1, 2010. John L. Plueger, our President and Chief Operating Officer, was named Acting Chief Executive Officer, and Brian M. Monkarsh, formerly Vice President and Corporate Counsel, was named Senior Vice President and Assistant


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General Counsel. The inability by us to retain and motivate our key employees 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:
 
  •  Demand for air travel
 
  •  Competition between carriers
 
  •  Fuel prices and availability
 
  •  Labor costs and stoppages
 
  •  Maintenance costs
 
  •  Employee labor contracts
 
  •  Air traffic control infrastructure constraints
 
  •  Airport access
 
  •  Insurance costs and coverage
 
  •  Heavy reliance on automated systems
 
  •  Geopolitical events
 
  •  Security, terrorism and war
 
  •  Worldwide health concerns
 
  •  Equity and borrowing capacity
 
  •  Environmental concerns
 
  •  Government regulation
 
  •  Interest rates
 
  •  Overcapacity
 
  •  Natural disasters
 
To the extent that our customers are affected by these risk factors, we may experience:
 
  •  lower demand for the aircraft in our fleet and reduced market lease rates and lease margins;
 
  •  a higher incidence of lessee defaults, lease restructurings and repossessions affecting net income due to maintenance, 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;
 
  •  a higher incidence of situations where we engage in restructuring lease rates for our troubled customers which reduces overall lease revenue;
 
  •  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
 
  •  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.
 
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 future outlook.
 
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 which meet


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the airlines’ demands, both in type and quantity, and fulfilling their contractual obligations to us. Further, competition between the manufacturers for market share is intense and may lead to instances of deep discounting for certain aircraft types and may negatively impact our competitive pricing. Should the manufacturers fail to respond appropriately to changes in the market environment or fail to fulfill their contractual obligations, we may experience:
 
  •  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;
 
  •  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;
 
  •  a marketplace with too many aircraft available, creating downward pressure on demand for the aircraft in our fleet and reduced market lease rates;
 
  •  poor customer support from the manufacturers of aircraft and components resulting in reduced demand for a particular manufacturer’s product, creating downward pressure on demand for those aircraft in our fleet and reduced market lease rates for those aircraft; and
 
  •  reduction in our competitiveness due to deep discounting by the manufacturers, which may lead to reduced market lease rates and may impact our ability to remarket or sell aircraft in our fleet.
 
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 equipment’s 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. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Flight Equipment.” 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.
 
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 — A joint committee of the US Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board is developing a new standard for lease accounting. In March 2009, both Boards released separate Discussion Papers for which the comment period closed in July 2009. The Boards have continued to discuss and modify their views on the issues presented in the Discussion Papers. The current view is to have lessees record a “right to use” asset and a lease obligation on their statement of financial


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position based upon the discounted lease payments, as defined. Lessors would record lease receivables and a performance obligation liability on their statement of financial position also based on the discounted lease payments, as defined. Lessor revenue would be modified to contain an interest income component as well as lease revenue. These views continued to be discussed and modified and are subject to further change as the Boards continue to deliberate. The Boards intend to issue an Exposure Draft of the proposed standard in the second quarter of 2010 and have a final standard promulgated by the first half of 2011. At present management is unable to assess the effects of adopting the new standard.
 
Item 1B.  Unresolved Staff Comments
 
None
 
Item 2.  Properties
 
Flight Equipment
 
Historically management has frequently reviewed 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 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. Until we have addressed our current financial position, we will likely not pursue any new aircraft purchases over and above our current contracted deliveries.
 
At December 31, 2009, all of our fleet was Stage III compliant. This means that the aircraft hold or are capable of holding a noise certificate issued under Chapter 3 of Volume 1, Part II of Annex 16 of the Chicago Convention or have been shown to comply with the Stage III noise levels set out in Section 36.5 of Appendix C of Part 36 of the Federal Aviation Regulations of the U.S. At December 31, 2009, the average age of aircraft in our fleet was 7.4 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, 2009:
 
                                                                                                         
Aircraft Type
  2010     2011     2012     2013     2014     2015     2016     2017     2018     2019     2020     2021     Total  
 
737-300/400/500
    5       13       11       13       7       4                                                       53  
737-600/700/800
    3       27       41       33       22       25       26       15       7       3                       202  
757-200
    3       10       14       11       13       9       2                                               62  
767-200
                    1       1       1                                                               3  
767-300
    1       9       6       10       9       9       2       2                                       48  
777-200
    1       12       8       8       3               2       1       3                               38  
777-300
            3       1       2       1                       11       10       7               1       36  
747-300
            2                                                                                       2  
747-400
    1       8       6       2                                                                       17  
MD-11
            2               3       3                                                               8  
A300-600R/F
                                    2       2               1       1                               6  
A310
    1       1               2                                                                       4  
A319
    1       6       17       19       24       16       13       16       8       9       1       2       132  
A320
    6       20       27       22       29       24       23       6       5       4       4               170  
A321
    1       11       6       6       26       7       19       6       1       3                       86  
A330-200
    1       6       13       13       11       6       4       4                       2       1       61  
A330-300
    3       6       3       4       2       7       4                                               29  
A340-300
    2       6       3       3       1                                                               15  
A340-600
                            1       1       4       2       2       2       1                       13  
                                                                                                         
Total
    29       142       157       153       155       113       97       64       37       27       7       4       985  
                                                                                                         
 
The schedule excludes eight aircraft which were not subject to lease at December 31, 2009, seven of which were subsequently leased. As of February 25, 2010, leases covering 11 of the 29 aircraft with lease expiration dates in 2010 had been extended or leased to other customers.


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Commitments
 
At December 31, 2009, we had committed to purchase the following new aircraft at an estimated aggregate purchase price (including adjustment for anticipated inflation) of approximately $13.7 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
  2010     2011     2012     2013     2014     2015     2016     2017     2018     2019     Total  
 
737-600/700/800(a)
            5       5                                                               10  
787-8/9(a)
                    4       10       5       4       6       12       17       16       74  
A319-100
    1       1                                                                       2  
A320-200(a)
    3                                                                               3  
A321-200(a)
    1                                                                               1  
A350XWB-800/900(a)
                                    2       4       8       6                       20  
A380-800(b)
                            5       3       2                                       10  
                                                                                         
Total
    5       6       9       15       10       10       14       18       17       16       120  
                                                                                         
 
(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)  Subject to cancellation options before December 31, 2010. Subsequent to December 31, 2009, we delayed the deliveries of the A380s, each by one year.
 
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 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, 2009, we had made non-refundable deposits (exclusive of capitalized interest) with respect to the aircraft which we have committed to purchase of approximately $79 million with Boeing and $55 million with Airbus.
 
As of February 25, 2010, 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     Leased     % Leased  
 
2010
    5       5       100 %
2011
    6       2       33  
2012
    9       3       33  
2013(a)
    10       9       90  
2014(a)
    12       7       58  
Thereafter(a)
    78       14       18  
 
 
(a) Subsequent to December 31, 2009, the A380 aircraft on order were delayed, each by one year. The original delivery dates were five in 2013, three in 2014 and two in 2015, respectively.
 
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, 2009, we occupied approximately


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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:  We are named in lawsuits in connection with the January 3, 2004 crash of our Boeing 737-300 aircraft on lease to Flash Airlines, an Egyptian carrier. These lawsuits were filed by the families of victims on the flight and seek unspecified damages for wrongful death, costs and fees. The initial lawsuit was filed in May 2004 in California, and subsequent lawsuits were filed in California and Arkansas. All cases filed in the U.S. were dismissed on the grounds of forum non conveniens and transferred to the French Tribunal de Grande Instance (“TGI”) civil court in either Bobigny or Paris. The Bobigny plaintiffs challenged French jurisdiction, whereupon the TGI decided to retain jurisdiction, on appeal the Paris Court of Appeal reversed, and on appeal the French Cour de Cassation elected to defer its decision pending a trial on the merits. We believe we are adequately covered in these cases by the liability insurance policies carried by Flash Airlines and we have substantial defenses to these actions. We do not believe that the outcome of these lawsuits will have a material effect on our consolidated financial condition, results of operations or cash flows.
 
Krasnoyarsk Airlines (“KrasAir”):  We leased a 757-200ER aircraft to a Russian airline, KrasAir, which is now the subject of a Russian bankruptcy-like proceeding. The aircraft lease was assigned to another Russian carrier, Air Company “Atlant-Soyuz” Incorporated, which defaulted under the lease. In the first quarter of 2009, we were informed that the Russian customs authority had seized the aircraft during a time frame we believe to be late 2008. The aircraft was seized on the basis of certain alleged violations by KrasAir with respect to the import of the aircraft, including the import type and customs fees owed. The Russian customs authority filed a case in April 2009 in the general jurisdiction court in Moscow, Russia seeking an order permitting it to confiscate the aircraft due to these alleged violations. Shortly after the lawsuit was filed, we intervened in the lawsuit in order to protect our ownership rights and informed the insurance underwriters under KrasAir’s, Atlant-Soyuz’s, and our insurance policies of this matter. In the second quarter of 2009, the court decided that the seizure of the aircraft by the Russian customs authority was improper and denied the Russian customs authority’s request to confiscate the aircraft. Also in the second quarter of 2009, another Russian airline signed a lease for the aircraft. The aircraft was returned to us by the Russian customs authority and is currently undergoing maintenance in Moscow, Russia and we are currently negotiating a resolution of all customs-related issues with the Russian customs authority. We cannot predict what the outcome of this matter will be, but we do not believe that it will be material to our consolidated financial position, results of operations or cash flows.
 
Estate of Volare Airlines (“Volare”):  In November 2004, Volare, an Italian airline, filed for bankruptcy in Italy. Prior to Volare’s 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 of one A330-200 aircraft by an entity that is a related party to us. In October 2009, the Volare bankruptcy receiver filed a claim in an Italian court in the amount of €29,592,210 against us and our related party for the return to the Volare estate of all payments made by Volare to us and our related party in the year prior to Volare’s bankruptcy filing. We have engaged Italian counsel to represent us and intend to defend this matter vigorously. We cannot predict the outcome of this matter, but we do not believe that it will be material to our consolidated financial position, results of operations or cash flows.
 
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.


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PART II
 
Item 5.  Market for Registrant’s 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 2009. In 2008 and 2007 we paid and accrued dividends to our parent company aggregating $46.4 million and $38.0 million, respectively. Under the most restrictive provisions of our public debt indentures and bank credit agreements, consolidated retained earnings at December 31, 2009 in the amount of approximately $2.5 billion were unrestricted as to the payment of dividends. We are, however, currently restricted from paying dividends to AIG under the FRBNY Credit Agreement.
 
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 Management’s 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,  
    2009     2008     2007     2006     2005  
    (Dollar amounts in thousands)  
Operating Data:
                                       
Rentals of flight equipment
  $ 5,275,219     $ 4,943,448     $ 4,587,611     $ 3,984,948     $ 3,482,210  
Flight equipment marketing
    (11,687 )     46,838       30,613       71,445       66,737  
Interest and other income
    58,209       98,260       111,599       86,304       61,426  
Total revenues
    5,321,741       5,088,546       4,729,823       4,142,697       3,610,373  
Expenses
    3,925,574       3,993,825       3,814,938       3,426,590       2,936,190  
Income before income taxes
    1,396,167       1,094,721       914,885       716,107       674,183  
Net income
    895,629       703,125       604,366       499,267       438,349  
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends(a):
    2.00 x     1.66 x     1.52 x     1.43 x     1.50 x
Balance Sheet Data:
                                       
Flight equipment under operating leases (net of accumulated depreciation)
  $ 43,929,801     $ 43,220,139     $ 41,797,660     $ 38,475,949     $ 34,748,932  
Net investment in finance and sales-type leases
    261,081       301,759       307,083       283,386       308,471  
Total assets
    45,967,042       47,315,514       44,830,590       42,035,528       37,530,327  
Total debt(b)
    29,711,739       32,476,668       30,451,279       28,860,242       26,104,165  
Shareholders’ equity
    8,550,176       7,625,213       7,028,779       6,574,998       6,172,562  
                                         
Other Data:
                                       
Aircraft lease portfolio at period end(c):
                                       
Owned
    993       955       900       824       746  
Subject to finance and sales-type leases
    11       9       9       10       17  
Aircraft sold or remarketed during the period
    9       11       9       21       29  
 
 
 (a) See Exhibit 12.
 
 (b)  Includes subordinated debt, synthetic lease obligations and loans from AIG Funding when applicable and does not include foreign currency adjustment related to foreign currency denominated debt swapped into $US.
 
 (c) See “Item 2. Properties — Flight Equipment.


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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Our primary business operation has historically been to acquire new commercial jet aircraft from Boeing and Airbus and lease those aircraft to airlines throughout the world. Until we have addressed our current financial position, we will likely not pursue any new aircraft purchases over and above our current contracted deliveries. We will continue to lease our existing fleet and 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, and remarket and sell aircraft owned by others for a fee. 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.
 
Our Fleet
 
During 2009, we took delivery of 49 new aircraft from Boeing and Airbus and sold nine aircraft from our leased fleet. As of December 31, 2009, we owned 993 aircraft, had 11 additional aircraft in the fleet classified as finance and sale-type leases, and provided fleet management services for 99 aircraft. We have contracted with Airbus and Boeing to buy 120 new aircraft for delivery through 2019 with an estimated purchase price of $13.7 billion. We anticipate the purchases to be financed in part by operating cash flows and in part by incurring additional debt.
 
Of the 120 aircraft on order, 74 are 787s 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 for 29 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 February 25, 2010, there have been no cancellations by any party. One customer, however, with signed leases for two 787s ceased operations during the fourth quarter of 2009. We are in discussions with Boeing related to potential delay compensation and penalties for which we may be eligible. Under the terms of our 787 leases, particular lessees may be entitled to share in any compensation that we receive from Boeing for late delivery of the aircraft.
 
Debt Financing
 
We have generally financed our aircraft purchases through available cash balances, internally generated funds and debt financings. A combination of the challenges facing our parent, AIG, the downgrades in our credit ratings by the rating agencies, and the turmoil in the credit markets has eliminated our ability to access the commercial paper market and limited our access to the debt markets. We are currently seeking secured financings. See “Liquidity” below. During 2009, we entered into two credit agreements aggregating $3.9 billion with AIG Funding to assist in funding our liquidity needs, including the repayment of $2.0 billion under our revolving credit agreement that matured on October 15, 2009. The loans are secured by a portfolio of aircraft and other assets related to the pledged aircraft. In order to receive the FRBNY’s consent to the loans, we also guaranteed the repayment of AIG’s obligations under the FRBNY Credit Agreement up to an amount equal to the aggregate outstanding balance of the loans entered into with AIG Funding. See “Liquidity” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt Financings.
 
Aircraft Industry and Sources of Revenues
 
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, 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.


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We are currently seeing financial stress to varying degrees across the airline industry largely precipitated by recent volatility in fuel costs, lower demand for air travel, tightening of the credit markets, and generally worsened economic conditions. We have seen airlines declare bankruptcy, cease operations, cancel routes, eliminate jobs, and retire aircraft in an attempt to reduce capacity. The financial stress has caused a slow-down in the airline industry. We believe that these conditions will continue through most of 2010 and will have a negative impact on our future operating results through increased costs associated with repossessing and deploying aircraft. There is generally a lag before an improvement in the economic conditions result in an increase in travel and a recovery of the financial health of the airline industry. Recently we have seen freight traffic, which often is considered the bellwether of the airline industry, starting to recover, and we currently see our customers increasingly willing to extend their existing leases. This could indicate that we may see some financial recovery of the airline industry starting in late 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, that 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 planes that are less in demand and have lower lease rates. In the fourth quarter of 2009, we recognized impairment charges in the amount of $52.9 million related to three older out-of-production aircraft. As of December 31, 2009, in addition to these three aircraft, we had identified 14 aircraft as being susceptible to failing the recoverability test. These 14 aircraft had an aggregate net book value of approximately $312 million at December 31, 2009. Management believes that the carrying values of these and all other aircraft are supported by the estimated future undiscounted cash flows expected to be generated by each aircraft.
 
As a result of the above conditions, three of our customers ceased operations during 2009; FlyLAL — Lithuanian Airlines, Myair.com S.p.A., and Globespan Airways Ltd. These customers operated nine of our aircraft. Eight of which were subsequently leased to other airlines and one remained available for lease at February 25, 2010.
 
There are lags between changes in current market conditions and their impact on our results, as contracts signed during times of higher lease rates currently remain in effect. Therefore, the current market conditions and their potential effect may not yet be fully reflected in our results. Although we continue to see lease rates contracting across most aircraft types, the rate of contraction has generally slowed as of February 25, 2010. Management monitors all lessees that are behind in lease payments and discusses relevant operational and financial issues facing 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. During the fourth quarter of 2009, we restructured past due lease payments aggregating $35.1 million relating to eight customers operating 27 aircraft. At December 31, 2009, 12 customers operating 25 aircraft remained two or more months past due on $31.9 million of lease payments relating to some of those aircraft. Of this amount, we recognized $25.0 million in rental income through December 31, 2009, and as of February 25, 2010, we had collected $23.9 million thereof. In comparison, at December 31, 2008, 20 customers operating 73 aircraft were two or more months past due on $49.3 million of lease payments relating to some of those aircraft. Of this amount, we recognized $45.5 million in rental income through December 31, 2008.
 
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 relevant operational and financial issues facing the lessees with our marketing executives. As of December 31, 2009, customers with $36.4 million carrying value of notes receivable were two months or more behind on principal and interest payments totaling $2.6 million.
 
Despite industry cyclicality and current stress, we remain optimistic about the long-term future of air transportation and, more specifically, the growing role that the leasing industry, and ILFC specifically, provides in facilitating the fleet transactions necessary to facilitate the growth of commercial air transport. At February 25, 2010, we have signed leases for all of our new aircraft deliveries through the end of 2010. Furthermore, our


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contractual purchase commitments for future new aircraft deliveries through 2019 are at historic lows. We are working to solve our liquidity challenges as part of our strategic plan, to position ourselves to reap benefits from any opportunities that a down market may present.
 
Liquidity
 
As of the date of this report, due to the challenges facing our parent, AIG, the downgrades in our credit ratings by the rating agencies, and the recent turmoil in the credit markets, we are unable to access the commercial paper market and have limited access to unsecured debt markets and have borrowed the maximum amount under our senior revolving credit facilities. Therefore, we have recently funded our aircraft purchase commitments and maturing debt obligations and other contractual obligations through other methods, including secured financings and support from AIG.
 
At December 31, 2009, we had approximately $682 million available for the financing of new Airbus aircraft under our 2004 ECA facility. As a result of our current long-term debt ratings, under the terms of our 1999 and 2004 ECA facilities, we are required to segregate into accounts controlled by the security trustees of the ECA facilities security deposits, maintenance reserves, and rental payments received under the leases related to the aircraft funded under the facilities (segregated rental payments will be used to pay principal and interest on the outstanding debt). Segregated amounts totaled approximately $315 million at December 31, 2009. In addition, we need written consent from the security trustee of our 2004 ECA facility before we can fund future Airbus aircraft deliveries under the facility. We obtained consent for 19 of the 24 Airbus aircraft we purchased since March 17, 2009, when the security trustee’s consent became required. We financed the 19 aircraft under the facility during 2009, and subsequent to December 31, 2009, we obtained consent for and expect to finance the remaining five aircraft delivered in the fourth quarter of 2009 in March 2010.
 
We borrowed $3.9 billion from AIG Funding during 2009 to assist in funding our liquidity needs, including the repayment of our obligations under our $2.0 billion revolving credit agreement that matured on October 15, 2009. These term loans are secured by a portfolio of aircraft and other assets related to the pledged aircraft. See “Debt Financings — Loans from AIG Funding.” We also entered into secured financings with respect to two aircraft during the second quarter of 2009. Under our existing public debt indentures and bank loans, we and our subsidiaries are permitted to incur secured indebtedness totaling up to 12.5% of consolidated net tangible assets, as defined in such debt agreements, which is currently approximately $4.7 billion. Therefore, we can currently incur additional secured financings totaling approximately $800 million under these existing debt agreements, provided we receive any required consents from the FRBNY. Furthermore, it may be possible, subject to receipt of any required consents from AIG Funding, the FRBNY, and the lenders under our bank loans, for us to obtain secured financing without regard to the 12.5% consolidated net tangible asset limit referred to above (but subject to certain other limitations) by doing so through subsidiaries that qualify as non-restricted under our public debt indentures. We will need to seek relief from our bank lenders with regard to the 12.5% limitation. We cannot predict whether the banks, AIG Funding, or the FRBNY will consent to us incurring additional secured debt.
 
We are also currently pursuing potential aircraft sales which could aggregate up to $3.5 billion in proceeds. Proposed portfolios have been presented to potential buyers; some bids have been received and are being evaluated. In evaluating the bids we are balancing 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 for the portfolio, and whether we can reach an agreement with terms acceptable to the buyers and us. If an agreement is reached, the transaction would also have to be approved by the FRBNY. Therefore, we cannot predict whether a sale of aircraft will occur. Because the current market for aircraft is depressed due to the economic downturn and limited availability of buyer financing, a 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 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.
 
Because of the poor condition of current credit markets and AIG’s plans to explore alternative restructuring opportunities for us, we may not be able to obtain additional secured financing from third parties on favorable terms, if at all. We also may be unable to reach an agreement to sell a portfolio of our aircraft on terms acceptable to both


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parties. Therefore, we may need to seek additional support from AIG, which is subject to the FRBNY’s consent. We cannot predict whether AIG can obtain the FRBNY’s consent to allow AIG to provide additional support to us.
 
Consideration of ILFC’s Ability to Continue as a Going Concern
 
Current Situation
 
As discussed in greater detail above under “Liquidity,” we are currently unable to access the commercial paper market and have limited access to unsecured debt markets and we cannot determine if the commercial paper market will be available to us again, or when we will be able to access the unsecured markets. As a result, we borrowed $3.9 billion from AIG Funding during 2009 to fund our liquidity needs and we are currently seeking secured financings, as permitted under our existing debt agreements.
 
Furthermore, as a subsidiary of AIG, we are subject to the covenants in the FRBNY Credit Agreement and our credit agreements with AIG Funding also contain restrictive covenants. The covenants in these credit agreements restrict, among other things, our ability to:
 
  •  incur debt;
 
  •  encumber our assets;
 
  •  dispose of certain assets;
 
  •  enter into sale-leaseback transactions;
 
  •  make equity or debt investments in other parties;
 
  •  make capital expenditures; and
 
  •  pay dividends and distributions.
 
These covenants may affect our ability to operate and finance our business as we deem appropriate, including our ability to incur secured indebtedness or sell aircraft in order to meet our liquidity needs..
 
Management’s Plans
 
Because we cannot determine if the commercial paper market will be available to us or when the unsecured debt markets may become fully available to us again, we are currently seeking other ways to fund our aircraft purchase commitments and future maturing obligations.
 
We are currently seeking the following sources of funding, as discussed in greater detail above under “Liquidity”:
 
  •  We intend to continue to seek financing available under our 2004 ECA facility. At December 31, 2009, we had approximately $682 million available for the financing of Airbus aircraft under our 2004 ECA facility. As a result of our current long-term debt ratings, we are required to receive written consent from the security trustee before we can fund future Airbus aircraft deliveries. We obtained consent for 19 of the 24 Airbus aircraft we purchased since March 17, 2009, when the security trustee’s consent became required. We financed the 19 aircraft under the facility during 2009, and subsequent to December 31, 2009, we obtained consent for and expect to finance the remaining five aircraft delivered in the fourth quarter of 2009 in March 2010.
 
  •  We are currently seeking secured financings aggregating $750 million from various institutions. Under our existing debt agreements we and our subsidiaries have certain restrictions, as mentioned above, and currently have approximately $800 million available to us for additional secured financings.
 
  •  We are currently pursuing potential aircraft sales that could aggregate up to $3.5 billion in proceeds. Significant uncertainties exist regarding whether we could reach an agreement with buyers, what the terms of any potential sale would be and whether the FRBNY would approve any agreement reached by our Board of Directors. Because the current market for aircraft is depressed due to the economic downturn and limited availability of buyer financing, a sale would likely result in a realized loss, which could be material to our results of operations for an individual reporting period. If the sales portfolios on offer result in sales, there will be an aging of the ILFC aircraft fleet. The portfolios are not cross sections of the ILFC aircraft fleet, but consist of primarily younger aircraft.
 
The FRBNY collateral pool is very large and consists of younger, in production aircraft. The FRBNY must approve all sales and secured borrowing, other than borrowing under the 2004 ECA facility. We cannot predict how this will impact the timing and conclusion of any potential sales.


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If the above sources of liquidity are not sufficient to meet our contractual obligations as they come due over the next twelve months, we will seek additional funding from AIG, which funding would be subject to the consent of the FRBNY.
 
As stated in AIG’s annual report on Form 10-K for the period ended December 31, 2009, AIG intends to provide support to us through February 28, 2011, to the extent that secured financing, aircraft sales and other sources of funds are not sufficient to meet liquidity needs.
 
Management’s Assessment and Conclusion
 
In assessing our current financial position, liquidity needs and ability to meet our obligations as they come due, management made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:
 
  •  credit ratings downgrade risk which could further reduce our ability to access public debt markets and our private debt;
 
  •  financing requirements for future debt repayments and aircraft purchase commitments;
 
  •  the potential financing sources discussed above;
 
  •  cash flows from operations, including potential non-performance of lessees and the mitigation of such impact on revenue due to repossession rights, security deposits and overhaul rentals; and
 
  •  cash flows generated from potential sales of aircraft portfolios and any uncertainties associated with those sales.
 
Based on AIG’s expressed intention to support us, its recent funding of $2.2 billion to us to repay our maturing debt, and management’s plans as described above, and after consideration of the risks and uncertainties of such plans, management believes we will have adequate liquidity to finance and operate our business and repay our obligations for at least the next twelve months.
 
It is possible that the actual outcome of one or more of management’s plans could be materially different or that one or more of management’s significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.
 
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, nor relating to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.
 
Our Relationship with AIG
 
AIG has experienced liquidity problems that began in the third quarter of 2008 and, as a result, it has entered into a series of transactions with the FRBNY and the U.S. Department of the Treasury.
 
The FRBNY Credit Agreement
 
As more fully described in AIG’s annual report on Form 10-K for the period ended December 31, 2009, the FRBNY Credit Agreement obligations are guaranteed by certain AIG subsidiaries and the obligations are secured by a pledge of certain assets of AIG and its subsidiaries. As a subsidiary of AIG, we are subject to covenants under the FRBNY Credit Agreement, including covenants that may, among other things, limit our ability to incur debt, encumber or sell our assets, enter into sale-leaseback transactions, make equity or debt investments in other parties and pay distributions and dividends. In addition, although we are not a guarantor of the FRBNY Credit Agreement and did not pledge any assets to secure AIG’s obligation under that agreement, in connection with our borrowings from AIG Funding, in order to receive the FRBNY’s consent to the loans we did guarantee the repayment of AIG’s obligations under the FRBNY Credit Agreement up to an amount equal to the aggregate outstanding balance of our term loans from AIG Funding. AIG is required to repay the FRBNY Credit Agreement primarily from proceeds on


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sales of assets, including businesses. AIG is exploring divestiture opportunities for its non-core businesses and is exploring alternative restructuring opportunities for us.
 
AIG Going Concern Consideration
 
In connection with the preparation of its annual report on Form 10-K for the year ended December 31, 2009, AIG management assessed whether AIG has the ability to continue as a going concern. Based on the U.S. government’s continuing commitment, the agreements in principle and the other expected transactions with the FRBNY and the U.S. Department of the Treasury, AIG management’s plans to stabilize its businesses and dispose of certain assets, and after consideration of the risks and uncertainties to such plans, AIG management indicated in the AIG annual report on Form 10-K for the year ended December 31, 2009 that it believes that it will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan and repay its obligations for at least the next twelve months. It is possible that the actual outcome of one or more of AIG management’s plans could be materially different, or that one or more of AIG management’s significant judgments or estimates about the potential effects of these risks and uncertainties could prove to be materially incorrect. If one of more of these possible outcomes is realized, AIG may need additional U.S. government support to meet its obligations as they come due. If AIG is not able to continue as a going concern it will have a significant impact on our operations, including limiting our ability to issue new debt and to receive additional support from AIG.
 
Debt Financings
 
We generally fund our operations, including aircraft purchases, through available cash balances, cash flows from operations, 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 include both public debt and bank facilities. In 2009, these funds were primarily provided by AIG Funding and other secured financings. At December 31, 2009, 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, a minimum fixed charge coverage ratio and a minimum consolidated tangible net worth.
 
During the year ended December 31, 2009, we borrowed $5.3 billion and $3.5 billion was provided by operating activities. The $5.3 billion borrowed included $1.1 billion borrowed under our 2004 ECA facility to fund Airbus aircraft purchases, $3.9 billion borrowed from AIG Funding to fund our other liquidity needs, including repaying our maturing debt obligations as they became due, and $0.3 billion of other financing arrangements. We had $336.9 million in cash and cash equivalents at December 31, 2009.


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Our debt financing was comprised of the following at the following dates:
 
                 
    December 31,  
    2009     2008  
    (Dollars in thousands)  
 
Secured
               
ECA Financings
  $ 3,004,763     $ 2,436,296  
Loans from AIG Funding
    3,909,567        
Other Secured Financings(a)
    153,116        
                 
      7,067,446       2,436,296  
Unsecured
               
Commercial Paper
          1,752,000  
Public Bonds and Medium-Term Notes
    16,566,099       19,748,541  
Bank Debt
    5,087,750       7,558,750  
                 
      21,653,849       29,059,291  
                 
Total Secured and Unsecured Debt Financing
    28,721,295       31,495,587  
Less: Deferred Debt Discount
    (9,556 )     (18,919 )
                 
      28,711,739       31,476,668  
Subordinated Debt
    1,000,000       1,000,000  
                 
    $ 29,711,739     $ 32,476,668  
                 
Selected interest rates and ratios which include the effect of derivative instruments:
               
Composite interest rate
    4.35%       4.51%  
Percentage of total debt at fixed rate
    58.64%       63.89%  
Composite interest rate on fixed debt
    5.42%       5.41%  
Bank prime rate
    3.25%       3.25%  
 
(a)  Of this amount, $129.6 million is non-recourse to ILFC. These secured financings were incurred by Variable Interest Entities and consolidated.
 
The above amounts represent the anticipated settlement of our currently outstanding debt obligations. 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 US 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 $391.1 million and $338.1 million at December 31, 2009 and 2008, respectively. Composite interest rates and percentages of total debt at fixed rates reflect the effect of derivative instruments. Our lower composite interest rate at December 31, 2009, compared to December 31, 2008, is driven by a decrease in short-term interest rates.
 
ECA Financings
 
Export Credit Facilities:  We entered into ECA facilities in 1999 and 2004. The 2004 ECA facility is currently used to fund purchases of Airbus aircraft, while new financings are no longer available to us under the 1999 ECA facility. The loans made under the ECA facilities are used to fund a portion of each aircraft’s net purchase price.
 
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%. The loans are guaranteed by various European Export Credit Agencies. We have collateralized the debt by a pledge of the shares of a wholly-owned subsidiary that holds title to the aircraft financed under the facility. At December 31, 2009, 32 loans with an aggregate principal value of $146.1 million remained outstanding under the facility and the net book value of the related aircraft was $1.8 billion. Twenty-one of the loans outstanding under the 1999 ECA facility are scheduled to mature during 2010.


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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. Funds become available under this facility when the various European Export Credit Agencies provide guarantees for aircraft based on a forward-looking calendar. The financing is for a ten-year fully amortizing loan per aircraft at an interest rate determined through a bid process. We have collateralized the debt by a pledge of the shares of a wholly-owned subsidiary that holds title to the aircraft financed under this facility. As of December 31, 2009, we had financed 66 aircraft using approximately $4 billion under this facility and approximately $2.9 billion was outstanding. The interest rates are either fixed or based on LIBOR. At December 31, 2009, the interest rates of the outstanding loans ranged from 0.45% to 4.71%. The net book value of the related aircraft was approximately $4.0 billion at December 31, 2009. As of February 25, 2010, we had approximately $682 million available under this facility.
 
Under the terms of our 1999 and 2004 ECA facilities, our current long-term debt ratings impose the following restrictions: (i) we must receive written consent from the security trustee before we can fund Airbus aircraft deliveries under the 2004 ECA facility; (ii) we must segregate all security deposits, maintenance reserves, and rental payments received under the leases of the aircraft financed under the 1999 and 2004 ECA facilities into separate accounts controlled by the security trustees (segregated rental payments will be used to pay principal and interest on the outstanding debt); and (iii) we must file individual mortgages on the aircraft funded under the 1999 and 2004 ECA facilities in the local jurisdictions in which the respective lessees operate. At December 31, 2009, we had segregated security deposits, maintenance reserves and rental payments aggregating approximately $315 million related to aircraft funded under the 1999 and 2004 ECA facilities. The segregated amounts will fluctuate with changes in deposits, maintenance reserves, and debt maturities related to the aircraft funded under the facilities.
 
Since March 17, 2009, when the security trustee’s consent became required to finance aircraft purchases under the 2004 ECA facility, we obtained consent for and financed all 19 Airbus aircraft delivered through September 30, 2009 under the facility, and subsequent to December 31, 2009, we obtained consent for and expect to finance all five Airbus aircraft delivered during the fourth quarter of 2009 in March 2010. To the extent the security trustee of the 2004 ECA facility does not allow us to fund future purchases of Airbus aircraft under the facility, we would have to locate other sources of financing to fund these purchases, as described in greater detail above under “Liquidity,” which would put additional strain on our liquidity.
 
Loans from AIG Funding
 
In March 2009 we entered into two demand note agreements aggregating $1.7 billion with AIG Funding in order to fund our liquidity needs. Interest on the notes was based on LIBOR with a floor of 3.5%. On October 13, 2009, we amended and restated the two demand note agreements, including extending the maturity dates, and entered into a new $2.0 billion credit agreement with AIG Funding. We used the proceeds from the $2.0 billion loan to repay in full our obligations under our $2.0 billion revolving credit facility that matured on October 15, 2009. On December 4, 2009, we borrowed an additional $200 million from AIG Funding to repay maturing debt. The amount was added to the principal balance of the new credit agreement. These loans, aggregating $3.9 billion, mature on September 13, 2013 and are due in full at maturity with no scheduled amortization. The loans bore interest at a rate of 3-month LIBOR plus 3.025%, which was subsequently raised to 6.025%, as discussed below. The funds for the loans were provided to AIG Funding by the FRBNY pursuant to the FRBNY Credit Agreement. In order to receive the FRBNY’s consent to the loans, we entered into guarantee agreements to guarantee the repayment of AIG’s obligations under the FRBNY Credit Agreement up to an amount equal to the aggregate outstanding balance of the loans.
 
These loans (and the related guarantees) are secured by (i) a portfolio of aircraft and all related equipment and leases, with an aggregate average appraised value as of September 30, 2009 of approximately $7.4 billion plus additional temporary collateral with an aggregate average appraised value as of September 30, 2009 of approximately $10 billion that will be released upon the perfection of certain security interests, as described below; (ii) any and all collection accounts into which rent, maintenance reserves, security deposits and other amounts owing are paid under the leases of the pledged aircraft; and (iii) the shares or other equity interests of certain subsidiaries of ours that may own or lease the pledged aircraft in the future. In the event the appraised value of the collateral held falls below certain levels, we will be forced either to prepay a portion of the term loans without penalty or premium, or to grant additional collateral.


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We are also required to prepay the loans, without penalty or premium, upon (i) the sale of an aircraft (other than upon the sale or transfer to a co-borrower under the loans) in an amount equal to 75% of the net sale proceeds; (ii) the receipt of any hull insurance, condemnation or other proceeds in respect of any event of loss suffered by a pledged aircraft in an amount equal to 75% of the net proceeds received on account thereof; and (iii)  the removal of an aircraft from the collateral pool (other than in connection with the substitution of a non-pool aircraft for such removed aircraft in accordance with the terms of the loans) in an amount equal to 75% of the most recent appraised value of such aircraft. We are also required to repay the loans in full upon the occurrence of a change in control, which is defined in the loan agreements to include AIG ceasing to beneficially own 100% of our equity interests. We may voluntarily prepay the loans in part or in full at any time without penalty or premium.
 
The loans contain customary affirmative and negative covenants and include restrictions on asset transfers and capital expenditures. The loans also contain customary events of default, including an event of default under the loans if an event of default occurs under the FRBNY Credit Agreement. One event of default under the loans was the failure to perfect security interests, for the benefit of AIG Funding and the FRBNY, in certain aircraft pledged as collateral by December 1, 2009. We were unable to perfect certain of these security interests in a manner satisfactory to the FRBNY by December 1, 2009, and as a result entered into temporary waivers and amendments which (i) will allow us to release the temporary collateral of approximately $10 billion once we have completed the transfer of all the aircraft pledged as security to special purpose entities and perfected the security interests of all such aircraft for the benefit of AIG Funding and the FRBNY; (ii) required us to add certain aircraft leasing subsidiaries as co-obligors on the loans; and (iii) will require us to transfer pledged aircraft to special purpose entities within a prescribed time period (not less than three months from the date of notice) upon request, at any time, by AIG Funding (the “Transfer Mandate”). Pursuant to the temporary waiver and amendment, until all perfection requirements with regard to the pledged aircraft have been satisfied, the interest rate was raised to three-month LIBOR plus 6.025%, of which 3.0% is permitted to be paid-in-kind and is added to the principal balance of the loans. Additionally, if we do not comply with any Transfer Mandate within the prescribed time period, we will be in default under the loan agreements with AIG Funding and the interest rate may increase to three-month LIBOR with a 2% floor plus 9.025%. As of February 25, 2010, the FRBNY had not presented us with any Transfer Mandate. Within 30 days after our compliance with the perfection requirements for all of the pledged aircraft, including the transfer of all such aircraft to special purpose entities, a pool of aircraft with a 50% loan-to-value ratio will be selected by AIG Funding and the FRBNY from the pledged aircraft, and the additional temporary collateral with an aggregate appraised value of approximately $10 billion at September 30, 2009 will be released.
 
Other Secured Financing Arrangements
 
In May 2009, ILFC provided $39.0 million of subordinated financing to an entity, which we have determined is a Variable Interest Entity (“VIE”) of which we are the primary beneficiary. The primary beneficiary of a VIE is the party with the variable interest in the 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. See Note M of Notes to Consolidated Financial Statements. Accordingly, we consolidate the entity into our consolidated financial statements. The entity used these funds and an additional $106.0 million borrowed from third parties to purchase an aircraft, which the entity 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 have nine-year terms with interest rates based on LIBOR. At December 31, 2009, the interest rates on the $82.0 million and $24.0 million tranches were 3.385% and 5.085%, 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, 2009, $100.6 million was outstanding and the net book value of the aircraft was $142.1 million.
 
In June 2009, we borrowed $55.4 million through a wholly-owned subsidiary that is considered a VIE and owns one aircraft leased to an airline. The loan is non-recourse to ILFC and the loan is secured by the aircraft and the lease receivables. The interest rate on the loan is fixed at 6.58%. At December 31, 2009, $52.5 million was outstanding and the net book value of the aircraft was $94.6 million.


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Commercial Paper and Other Short-Term Debt
 
Commercial Paper: We have a $6.0 billion Commercial Paper Program and we had access to the FRBNY Commercial Paper Funding Facility (“CPFF”) from October 2008 through January 2009. As previously discussed under “Liquidity,” we are unable to issue new commercial paper with our current short-term debt ratings and we cannot determine if the commercial paper markets will be available to us again. At December 31, 2009, we have no commercial paper outstanding.
 
Other short-term financing: In April 2009, we entered into a $100.0 million 90-day promissory note agreement with a supplier in connection with the purchase of an aircraft. The interest rate was fixed at the annual rate of 5.00%. The note was paid in full on July 22, 2009, when it matured.
 
Public Bonds and Medium-Term Notes
 
Although legally available, debt issuance under our automatic shelf registration statement and our $7.0 billion Euro medium-term note programme is limited. The table below shows the maximum offerings available and amount outstanding under our sources of public debt:
 
                 
    Maximum
    Issued as of
 
    Offering     December 31, 2009  
    (Dollars in millions)  
Registration statement dated August 7, 2009(a)
    Unlimited (b)   $  
Euro Medium-Term Note Programme dated September 4, 2009(b)(d)
    7,000       1,903 (c)
 
 
(a)  We may establish new medium-term note programs under this new shelf registration statement when the public debt markets become fully available to us again. We currently have the ability to issue debt under the shelf registration statement in individual transactions, although the cost of funding has not been attractive to us.
 
(b)  As a result of our Well Known Seasoned Issuer (“WKSI”) status, we have an unlimited amount of debt securities registered for sale.
 
(c)  We have hedged the foreign currency risk of the notes through foreign currency swaps.
 
(d)  This is a perpetual program. As a bond issue matures, the principal amount of that bond becomes available for new issuances under the program.
 
At December 31, 2009, we had public bonds and medium-term notes in the amount of $16.6 million that were issued under prior registration statements. The interest rate on most of our public debt currently outstanding is effectively fixed for the terms of the notes.
 
Bank Debt
 
Revolving Credit Facilities:  We previously entered into three unsecured revolving credit facilities with an original group of 35 banks for an aggregate amount of $6.5 billion, consisting of a $2.0 billion tranche that expired and was paid in full in October 2009, a $2.0 billion tranche that expires in October 2010, and a $2.5 billion tranche that expires in October 2011. These revolving credit facilities provide for interest rates that vary according to the pricing option selected at the time of borrowing. Pricing options include a base rate, a rate ranging from 0.25% over LIBOR to 0.65% over LIBOR based upon utilization, or a rate determined by a competitive bid process with the banks. The credit facilities are subject to facility fees, currently 0.2% of amounts available. We are currently paying the maximum fees under the facilities. The fees are based on our current credit ratings and may decrease in the event of upgrades to our ratings. As of December 31, 2009, the maximum amount available of $4.5 billion under our active revolving credit facilities was outstanding and interest was accruing on the outstanding loans with interest rates based on LIBOR ranging from 0.91% to 0.93%. If AIG sells 51% or more of our equity interests without our lenders’ consent, it would be an event of default under our revolving credit facilities and would allow our lenders to declare our debt immediately due and payable.
 
Term Loans:  From time to time, we enter into funded bank financing arrangements. As of December 31, 2009, $0.6 billion was outstanding under these term loan agreements, which have varying maturities through February 2012. The interest rates are based on LIBOR with spreads ranging from 0.30% to 0.40%. At December 31, 2009, the interest rates ranged from 0.55% to 0.68%. If AIG sells 51% or more of our equity interests without our


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lenders’ consent, it would be an event of default under our funded bank financing agreements and would allow our lenders to declare our debt immediately due and payable.
 
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 has a call option date of December 21, 2010, and the $400 million tranche has a call option date of December 21, 2015. The tranche with the 2010 call option date has a fixed interest rate of 5.90% for the first five years, and the tranche with the 2015 call option date has a fixed interest rate of 6.25% for the first ten years. Each tranche has an interest rate adjustment if the call option for that tranche is not exercised. The new interest rate would be a floating rate, reset quarterly, based on the initial credit spread of 1.55% and 1.80%, respectively, plus the highest of (i) 3 month LIBOR; (ii) 10-year constant maturity treasury; and (iii) 30-year constant maturity treasury.
 
Derivatives
 
We employ a variety of 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.
 
We had four foreign currency swaps that were not designated as hedges prior to April 1, 2007, and our interest rate cap agreements were not designated as hedges in 2009. At December 31, 2009, 2008 and 2007, 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 swaps is that changes in their fair values are recorded in other comprehensive income instead of in earnings 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 swap and foreign currency swap agreements 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 instruments or 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. The net fair value of our derivatives was decreased by adjustments related to our counterparties’ credit risk and liquidity risk aggregating $4.0 million for the year ended December 31, 2009. The calculation of counterparties’ credit risks and liquidity risks aggregated $24.2 million and $19.8 million at December 31, 2009 and 2008, respectively.
 
Credit Ratings
 
The following table summarizes our current ratings and outlook by Fitch Ratings, Inc. (“Fitch”), Moody’s Investor Service, Inc. (“Moody’s”), and Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. (“S&P”), the nationally recognized ratings agencies:
 
                 
Rating Agency
  Long-Term Debt   Corporate Rating   Credit Watch/Review   Date of Last Action
 
Fitch
  BB   Not rated   Negative   February 17, 2010
Moody’s
  B1   Not rated   Negative   December 18, 2009
S&P
  BB+   BBB−   Negative   January 25, 2010
 
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.


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Our current long-term debt ratings impose the following restrictions under the 1999 and 2004 ECA facilities: (i) we need written consent from the security trustee before we can fund Airbus aircraft deliveries under the 2004 ECA facility; (ii) we must segregate all security deposits, maintenance reserves, and rental payments related to the aircraft financed under the 1999 and 2004 ECA facilities into separate accounts controlled by the security trustees (segregated rental payments will be used to pay principal and interest on the outstanding debt); and (iii) we must file individual mortgages on the aircraft funded under the facilities in the local jurisdictions in which the respective lessees operate.
 
While a ratings downgrade does not result in a default under any of our debt agreements, it would adversely affect our ability to issue unsecured debt, obtain new financing arrangements or renew existing arrangements, and would increase the cost of such financing arrangements.
 
The following table summarizes our contractual obligations at December 31, 2009.
 
Existing Commitments
 
                                                         
    Commitments Due by Year  
    Total     2010     2011     2012     2013     2014     Thereafter  
    (Dollars in thousands)  
 
Public, Bonds and Medium-term Notes
  $ 16,566,099     $ 4,021,085     $ 4,379,556     $ 3,571,492     $ 3,541,687     $ 1,041,717     $ 10,562  
Bank Credit Facilities
    4,500,000       2,000,000       2,500,000                          
Bank Term Loans
    587,750       102,750       335,000       150,000                    
                                                         
ECA Financings
    3,004,763       513,202       425,185       396,138       396,138       391,041       883,059  
Loans from AIG Funding
    3,909,567                         3,909,567              
Other Secured Financings
    153,116       13,280       13,901       14,878       15,963       36,716       58,378  
Subordinated Debt
    1,000,000                                     1,000,000  
Interest Payments on Debt Outstanding(a)(b)(c)
    6,890,948       1,279,554       1,030,568       740,569       484,324       146,584       3,209,349  
Operating Leases(d)(e)
    71,312       11,524       11,968       12,448       12,947       13,362       9,063  
Pension Obligations(f)
    8,483       1,268       1,319       1,370       1,431       1,512       1,583  
Tax Benefit Sharing Agreement Due to AIG
    85,000       85,000                                
Purchase Commitments
    13,698,800       242,700       247,600       639,400       2,150,000       1,396,300       9,022,800  
                                                         
Total
  $ 50,475,838     $ 8,270,363     $ 8,945,097     $ 5,526,295     $ 10,512,057     $ 3,027,232     $ 14,194,794  
                                                         
 
Contingent Commitments
 
                                                         
    Contingency Expiration by Year  
    Total     2010     2011     2012     2013     2014     Thereafter  
    (Dollars in thousands)  
 
Asset Value Guarantees(g)
  $ 529,708     $     $ 27,841     $ 78,950     $ 96,003     $ 14,300     $ 312,614  
Loan Guarantees
    26,891       2,520                               24,371  
                                                         
Total(h)
  $ 556,599     $ 2,520     $ 27,841     $ 78,950     $ 96,003     $ 14,300     $ 336,985  
                                                         
 
(a)  Includes interest on loans from AIG Funding.
 
(b)  Future interest payments on floating rate debt are estimated using floating interest rates in effect at December 31, 2009.
 
(c)  Includes the effect of interest rate and foreign currency derivative instruments.
 
(d)  Excludes fully defeased aircraft sale-lease back transactions.
 
(e)  Minimum rentals have not been reduced by minimum sublease rentals of $7.9 million receivable in the future under non-cancellable subleases.
 
(f)  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 “2010” consists of total estimated allocations for 2010 and “Thereafter” has not been estimated. The amount allocated has not been material to date.
 
(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.


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(h)  Excluded from total contingent commitments are $165.8 million of uncertain tax liabilities and any effect of net tax liabilities. See Note I 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 designs 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. We have determined that we are the primary beneficiary of these entities because we have exposure to the majority of the risks and rewards of these entities. We do not, however, have legal or operational control over and we do not own the assets nor are we directly obligated for the liabilities of these entities. As such, the assets and liabilities of these entities are presented separately on our Consolidated Balance Sheets. Assets in the amount of $79.7 million and $98.7 million and liabilities in the amount of $6.5 million and $10.7 million are included in our 2009 and 2008 Consolidated Balance Sheets and net expenses in the amounts of $7.2 million, $2.3 million, and $3.8 million are included in our Consolidated Statements of Income for the years ended December 31, 2009, 2008, and 2007, respectively, for these entities. We have a credit facility with these entities to provide financing up to approximately $13.6 million, of which approximately $8.4 million was borrowed at December 31, 2009. The maximum exposure to loss for these entities is $79.7 million, which is the total recorded asset balance of these entities.
 
Results of Operations
 
2009 Compared to 2008
 
Revenues from rentals of flight equipment increased 6.7% to $5,275.2 million for the year ended December 31, 2009, from $4,943.4 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 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) $76.3 million due to an increase in the number of leases containing overhaul provisions, resulting in an increase in the aggregate hours flown on which we collect overhaul 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 $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; (ii) 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; (iii) a $14.8 million decrease related to aircraft in service during the year ended December 31, 2008, and sold prior to December 31, 2009; and (iv) a $2.9 million decrease due to a straight-line adjustment taken in 2008, which increased the 2008 lease revenue. 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 incurred a


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loss of $11.7 million from flight equipment marketing for the year ended December 31, 2009, compared to revenues of $46.8 million for the year ended December 31, 2008. The loss incurred for the year ended December 31, 2009, was due to renegotiated leases which converted three operating leases into sales-type leases. We sold nine aircraft, three of which were accounted for as sales-type leases, for the year ended December 31, 2009. In comparison, we sold 11 aircraft during the same period 2008, one of which was accounted for as a sales-type lease. Additionally, we sold one engine during 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; 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.
 
Our composite borrowing rates fluctuated as follows from December 2006 to December 2009:
 
ILFC Composite Interest Rates and Prime Rates
 
(PERFORMANCE GRAPH)
 
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 O of Notes to Consolidated Financial Statements.


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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.
 
Provision for overhauls increased to $347.0 million for the year ended December 31, 2009, compared to $264.6 million for the year ended December 31, 2008, due to (i) an increase in the number of leases with overhaul provisions; (ii) an increase in hours flown resulting in an increase the estimated future reimbursements; and (iii) an increase in actual and expected overhaul related expenses.
 
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, 2009, consisted of (i) $52.9 million in aircraft impairment charges on three older aircraft and (ii) a $7.5 million charge taken in the first quarter of 2009 related to an aircraft classified as aircraft held for sale and subsequently sold.
 
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 N 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, ILFC’s 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 comprehensive income are primarily due to changes in market values of cashflow hedges. See Note G of Notes to the Consolidated Financial Statements.
 
Results of Operations
 
2008 Compared to 2007
 
Revenues from rentals of flight equipment increased 7.8% to $4,943.4 million in 2008 from $4,587.6 million in 2007. The number of aircraft in our fleet increased to 955 at December 31, 2008, compared to 900 at December 31, 2007. Revenues from rentals of flight equipment increased (i)  $415.9 million due to the addition of aircraft to our fleet that earned revenue during all or part of the year ended December 31, 2008, compared to no or partial earned revenue during 2007; (ii)  $29.7 million due to higher lease rates for certain aircraft that were in our fleet during both periods; and (iii) a $2.9 million straight-line rent adjustment. The increases were partially offset by (i) a $38.8 million decrease related to aircraft in service during the period ended December 31, 2007, and sold prior to December 31, 2008; (ii) a $24.1 million decrease due to 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; (iii) a $16.7 million decrease due to a decrease in the number of hours flown, on which we collect


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overhaul revenue; and (iv) a $13.1 million charge related to the early termination of ten ATA lease agreements. We had two aircraft in our fleet that were not subject to a signed lease agreement or a signed letter of intent at December 31, 2008, one of which was 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. Revenues from flight equipment marketing increased to $46.8 million for the year ended December 31, 2008, compared to $30.6 million for the year ended December 31, 2007, due to an increase in the number of, and the different types of, flight equipment sold in 2008 compared to 2007. During the year ended December 31, 2008, we sold 11 aircraft, one of which was accounted for as a sales-type lease. During year ended December 31, 2007, we sold nine aircraft, one of which was accounted for as a finance lease and one of which was converted from an operating lease to a sales-type lease. We also sold one engine during each of the years ended December 31, 2008 and 2007.
 
Interest and other revenue decreased to $98.3 million for the year ended December 31, 2008, compared to $111.6 million for the year ended December 31, 2007, due to (i) a $21.6 million decrease in settlements or sale of claims against bankrupt airlines; (ii) an $11.5 million decrease in foreign exchange gains; and (iii) lower management and other miscellaneous fees aggregating a decrease of $10.6 million. These decreases were offset by (i) an $18.8 million increase in deposit forfeitures for nonperformance by customers and (ii) an $11.6 million increase in interest revenues on Notes receivables and finance and sales-type leases.
 
Interest expense decreased to $1,576.7 million for the year ended December 31, 2008, compared to $1,612.9 million for the year ended December 31, 2007, as a result of lower short-term interest rates offset by (i) an increase in average debt outstanding (excluding the effect of debt discount and foreign exchange adjustments), primarily borrowed to finance aircraft acquisitions, to $31.5 billion in 2008 compared to $29.7 billion in 2007 and (ii)  a $29.3 million put fee related to bonds issued in 1997. Our average composite interest rate decreased to 4.84% in 2008 from 5.20% in 2007.
 
The Effect from derivatives, net of change in hedged items due to changes in foreign exchange rates was expenses of $39.9 million and $5.3 million for the years ended December 31, 2008 and 2007, respectively. The 2007 income effect includes a $16.0 million expense from derivatives with no hedge accounting treatment, net of foreign exchange gain or loss on the economically hedged item. We began applying hedge accounting for all our swap contracts at the beginning of the second quarter of 2007. The 2008 income effect includes $22.1 million of losses on matured swaps. 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 O of Notes to Consolidated Financial Statements.
 
Depreciation of flight equipment increased 7.4% to $1,864.7 million for the year ended December 31, 2008, compared to $1,736.3 million for the year ended December 31, 2007 due to the addition of new aircraft to our leased fleet, which increased the total cost of the fleet to $55.4 billion in 2008 from $52.2 billion in 2007.
 
Provision for overhauls decreased to $264.6 million for the year ended December 31, 2008, compared to $290.1 million for the year ended December 31, 2007, due to (i) a decrease in the aggregate number of hours flown, on which we collect overhaul revenue, which results in a decrease in the estimated future reimbursements and (ii) a decrease in actual and expected overhaul related expenses.
 
Selling, general and administrative expenses increased to $183.4 million for the period ended December 31, 2008, compared to $152.3 million for the year ended December 31, 2007, due to (i) a $21.5 million increase in employee-related expenses and (ii) a $13.8 million increase in operating expenses to support our growing fleet. The increases were offset by minor savings aggregating $4.2 million.
 
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 N 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 year ended December 31, 2008, increased to 35.8% in 2008 from 33.9% in 2007. The increase is primarily due to Internal Revenue Service (“IRS”) audit and interest adjustments related to 2007 and


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previous tax years recorded in 2008. 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 $51.0 million 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, ILFC’s 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 2009 ($85.0 million). The liability is recorded in Tax benefit sharing payable to AIG on the 2008 Consolidated Balance Sheet.
 
Accumulated other comprehensive (loss) income was $(168.1) million and $(106.2) million at December 31, 2008 and 2007, respectively. Fluctuations in Accumulated other comprehensive income are primarily due to changes in market values of cashflow hedges. See Note G of Notes to the Consolidated Financial Statements.
 
Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of our financial condition and results of operations are 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 an on-going basis, we evaluate our estimates, including those related to revenue, depreciation, overhaul reserves, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results 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.
 
We believe the following critical accounting policies, can have a significant impact on our results of operations, financial position and financial statement disclosures, and may require subjective and complex estimates and judgments.
 
Lease Revenue: We lease flight equipment principally under operating leases and report rental income ratably over the life of the lease. The difference between the rental income recorded and the cash received under the provisions of the lease is included in Lease receivables and other assets on our Consolidated Balance Sheets. Past-due rentals are recognized on the basis of management’s assessment of collectibility. Management monitors all lessees that are behind in lease payments and discusses relevant operational and financial issues facing 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. In certain cases, leases provide for additional rentals 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. Rentals received, but unearned under the lease agreements, are recorded in Rentals received in advance on our Consolidated Balance Sheets until earned. Lease revenues from the rental of flight equipment have been reduced by payments received directly by us or by our customers from the aircraft and engine manufacturers.
 
Initial Indirect Costs: We treat as period cost internal and other costs incurred in connection with identifying, negotiating, and delivering aircraft to our lessees. Amounts paid by us to lessees or other parties in connection with the lease transactions are capitalized and amortized as a reduction to lease revenue over the lease term.
 
Flight Equipment Marketing: Flight equipment marketing consists of revenue 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.


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Provision for Overhauls: Under the provisions of many leases, we receive overhaul rentals based on the usage of the aircraft. For certain airframe and engine overhauls, the lessee is reimbursed for costs incurred up to, but not exceeding, related overhaul rentals paid by the lessee for usage of the aircraft.
 
Overhaul rentals are included under the caption Rental of flight equipment in our Consolidated Statements of Income. We provide a charge to operations for estimated future reimbursements at the time the overhaul rentals are paid by the lessee. The charge is based on overhaul rentals received and the estimated reimbursements during the life of the lease. The historical payout rate is subject to significant fluctuations. Using its judgment, management periodically evaluates the appropriateness of the reserve for these reimbursements and its reimbursement rate, and then adjusts the provision for overhauls accordingly. This evaluation requires significant judgment. If the reimbursements are materially different than our estimates, there will be a material impact on our results of operations.
 
Flight Equipment: Flight equipment under operating leases is stated at cost. Purchases, major additions and modifications and interest on deposits during the construction phase are capitalized. The lessee provides and pays for normal maintenance and repairs, airframe and engine overhauls and compliance with return conditions of flight equipment returned from lease. 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 on the straight-line basis to a zero residual value over its useful life of 35 years. When an aircraft is out of production, management evaluates the residual value of the aircraft type, and depreciates the aircraft using the straight-line method over a 25-year life from the date of manufacture to an established residual value for each aircraft type. Due to the significant cost of aircraft carried in Flight equipment under operating leases on our Consolidated Balance Sheets, any change in the assumption of useful life or residual values for all aircraft could have a significant impact on our results of operations.
 
At the time assets are retired or sold, the cost and accumulated depreciation are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss.
 
Management evaluates quarterly the need to perform a recoverability assessment as required under GAAP and performs a recoverability assessment of all aircraft in our fleet at least annually. An assessment is performed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. The undiscounted cash flows consist of cash flows from currently contracted leases, future projected lease rates and estimated residual or scrap values for each aircraft. Management is very active in the industry and develops the assumptions used in the recoverability analysis 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 factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, economic conditions, technology, airline demand for a particular aircraft type and many of the risk factors discussed in Item 1A. “Risk Factors.” In the event that an aircraft does not meet the recoverability test, 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.”
 
We recorded impairment charges related to three aircraft in the fourth quarter of 2009. In monitoring the aircraft in our fleet for impairment charges, 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 planes that are less in demand and have lower lease rates. As of December 31, 2009, we have, in addition to the three aircraft mentioned above, identified 14 aircraft as being susceptible to failing the recoverability test. These aircraft had a net book value of approximately $312 million at December 31, 2009. Management believes that the carrying value of these aircraft is supported by the estimated future undiscounted cash flows expected to be generated by each aircraft.
 
Derivative Financial Instruments: We employ a variety of derivative instruments to manage our exposure to interest rate risks and foreign currency risks. Accounting for derivatives is very complex. All derivatives are recognized on the balance sheet at their fair value. We obtain the values on a quarterly basis from AIG. When hedge treatment is achieved, the changes in market values related to the effective portion of the derivatives are recorded in


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other comprehensive income or in income, depending on the designation of the derivative as a cash flow hedge or a fair value hedge. The ineffective portion of the derivative contract is recorded in income. At designation of the hedge, we choose a method of effectiveness assessment, which we must use for the life of the contract. We use the “hypothetical derivative method” when we assess effectiveness. The calculation involves setting up a hypothetical derivative that mirrors the hedged item, but has a zero-value at the hedge designation date. The cumulative change in market value of the actual derivative instrument is compared to the cumulative change in market value of the hypothetical derivative. The difference is the calculated ineffectiveness and is recorded in income.
 
Fair Value Measurements: Fair value is 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 derivative assets and liabilities on a recurring basis. 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. AIG’s 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.
 
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. These assets include aircraft and notes receivable. Liabilities include Asset Value Guarantees. We principally use the income approach to measure the fair value of these assets and liabilities. The income approach is based on the present value of cash flows from contractual lease agreements and projected future lease payments, including contingent rentals, net of expenses, which extend to the end of the aircraft’s economic life in its highest and best use configuration, as well as a disposition value based on expectations of market participants.
 
Income Taxes: We are included in the consolidated federal income tax return of AIG. Our tax provision 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 they are currently realizable in AIG’s consolidated return. To the extent the benefit of a net operating loss is not utilized in AIG’s tax return, AIG will reimburse us upon the expiration of the loss carry forward period as long as we are still included in AIG’s 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.
 
New Accounting Pronouncements
 
Recent Accounting Pronouncements:
 
We adopted the following accounting standards during 2009:
 
In December 2007, the FASB issued an accounting standard that changed the accounting for business combinations.
 
In December 2007, the FASB issued an accounting standard that changed the classification of non-controlling (i.e., minority) interests in the consolidated financial statements.
 
In March 2008, the FASB issued an accounting standard that requires enhanced disclosures about derivative instruments and hedging activities.
 
In December 2008, the FASB issued an accounting standard related to employers’ disclosures about post-retirement benefit plan assets.
 
In December 2008, the FASB issued an accounting standard that amends and expands the disclosure requirements regarding transfers of financial assets and a company’s involvement with VIEs.


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In April 2009, the FASB issued an accounting standard that requires interim disclosures about fair value of financial instruments.
 
In April 2009, the FASB issued an accounting standard related to the recognition and presentation of other-than-temporary impairments.
 
In April 2009, the FASB issued an accounting standard related to 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 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.
 
In June 2009, the FASB issued an accounting standard related to the establishment of FASB Accounting Standards Codification (“ASC”).
 
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.
 
Future Application of Accounting Standards:
 
In June 2009, the FASB issued an accounting standard related to accounting for transfers of financial assets.
 
In June 2009, the FASB issued an accounting standard related to the consolidation of VIEs.
 
For further discussion of these recent accounting standards 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 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, 2009 and 2008. 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


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value for the periods ended December 31, 2009 and 2008. The VaR decreased, despite the year-to-year growth in lease income, primarily due to significant decreases in yield volatilities.
 
ILFC Market Risk
 
                                                 
    December 31, 2009     December 31, 2008  
    Average     High     Low     Average     High     Low  
    (Dollars in millions)
       
 
Combined
  $ 46.5     $ 80.0     $ 35.9     $ 53.2     $ 96.2     $ 36.1  
Interest Rate
    46.6       80.0       36.2       53.7       97.6       36.5  
Currency
    0.3       0.7       0.1       1.0       1.6       0.7  
 
 
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(T).  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 Acting Chief Executive Officer, President and Chief Operating Officer and the Vice Chairman and Chief Financial Officer (collectively the “Certifying Officers”), as appropriate, to allow timely decisions regarding required disclosure. Our management, including the Certifying Officers, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
We have evaluated, under the supervision and with the participation of management, including the Certifying Officers, 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, as of the end of the year covered by this annual report. Based on that evaluation, our Certifying Officers have concluded that our disclosure controls and procedures were effective as of December 31, 2009.
 
(B) Management’s Report on Internal Control over Financial Reporting
 
Management of ILFC is responsible for establishing and maintaining adequate internal control over financial reporting. ILFC’s 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 ILFC’s 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 ILFC’s internal control over financial reporting as of December 31, 2009 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, 2009, ILFC’s internal control over financial reporting was effective based on the criteria in Internal Control — Integrated Framework issued by the COSO.


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This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange commission that permit us to provide only management’s report in this annual report.
 
Variable Interest Entities
 
We have consolidated into our Consolidated Financial Statements, financial information related to certain Variable Interest Entities (“VIEs”) over which we do not have operational control. The assets and liabilities are presented separately on our Consolidated Balance Sheets. Our assessment of disclosure controls and procedures, as described above, includes those VIEs. Each of these VIEs has a discrete number of assets and liabilities and we, as lender and guarantor to the VIEs, have been provided sufficient information to conclude that our procedures with respect to these VIEs are effective in providing reasonable assurance that the information required to be disclosed by us relating to these entities is reconciled, processed, summarized and reported within the periods specified by the Securities and Exchange Commission. However, management has been unable to assess the effectiveness of internal controls at VIEs over which we do not have operational control due to our inability to dictate or modify the controls over financial reporting of those entities, or to assess those controls.
 
(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, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Subsequent to December 31, 2009, we had a change in our Certifying Officers due to the retirement of our Chief Executive Officer, Steven F. Udvar-Hazy, on February 5, 2010. John L. Plueger, formerly our President and Chief Operating Officer, has been named Acting Chief Executive Officer, President and Chief Operating Officer and is signing this report on Form 10-K as the Principal Executive Officer.
 
Item 9B. Other Information
 
None.


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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, 2009 and 2008, were:
 
                 
    2009     2008  
Audit Fees(a)
  $ 2,200,000     $ 1,300,000  
Tax Fees(b)
    139,400       412,000  
                 
Total Fees
  $ 2,339,400     $ 1,712,000  
                 
 
 
 
(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 AIG’s 2009 and 2008 assessment.
 
(b) Tax Fees consist of the aggregate fees for services rendered for tax compliance, tax planning and tax advice.
 
AIG’s 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.


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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
 
 
    44  
Consolidated Financial Statements:
       
    45  
    46  
    47  
    48  
    50  
 
The following financial statement schedule of the Company and its subsidiaries is included in Item 15(a)(2):
 
         
    86   
 
                 
Schedule Number
   
Description
 
Page
 
 
  II                   Valuation and Qualifying Accounts     87  
 
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
 
  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 (filed as an exhibit to Form 10-Q for the quarter ended September 30, 2009 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).
  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).


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Exhibit
     
Number
   
Description
 
  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     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     $2,000,000,000 Five-Year Revolving Credit Agreement dated as of October 14, 2005, 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 14, 2005, and incorporated herein by reference).

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Exhibit
     
Number
   
Description
 
  10.3     Amendment No. 1 to the $2,000,000,000 Five-Year Revolving Credit Agreement dated as of October 14, 2005, 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     $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).
  10.5     $2,000,000,000 Credit Agreement dated as of October 13, 2009, among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding, Inc., as lender, and Wells Fargo Bank Northwest, National Association, as security trustee (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (filed as an exhibit to the form 8-K filed on October 19, 2009 and incorporated herein by reference).
  10.6     $1,700,000,000 Amended and Restated Credit Agreement dated as of October 13, 2009, among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding, Inc., as lender, and Wells Fargo Bank Northwest, National Association, as security trustee (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (filed as an exhibit to the form 8-K filed on October 19, 2009 and incorporated herein by reference).
  10.7     First Lien Borrower Party Guarantee Agreement dated as of October 13, 2009, among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein for the benefit of the Federal Reserve Bank of New York (filed as an exhibit to the Form 8-K filed on October 19, 2009 and incorporated herein by reference).
  10.8     Third Lien Borrower Party Guarantee Agreement dated as of October 13, 2009, among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein for the benefit of the Federal Reserve Bank of New York (filed as an exhibit to the Form 8-K filed on October 19, 2009 and incorporated herein by reference).
  10.9     Amendment Agreement, dated as of November 23, 2009, among International Lease Finance Corporation named therein, AIG Funding, Inc., as lender, and Wells Fargo Bank Northwest, National Association, as security trustee, and the Federal Reserve Bank of New York (filed as an exhibit to the Form 8-K filed on December 7, 2009 and incorporated herein by reference).
  10.10     Temporary Waiver and Amendment dated as of December 1, 2009, among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding Inc., as lender, and the Federal Reserve Bank of New York (filed as an exhibit to the Form 8-K filed on December 7, 2009 and incorporated herein by reference).
  10.11     Temporary Waiver and Amendment No. 2, dated as of December 4, 2009, among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding Inc., as lender, and the Federal Reserve Bank of New York (filed as an exhibit to the Form 8-K filed on December 7, 2009 and incorporated herein by reference).
  10.12     Amendment to Credit Agreements and First Lien Guarantee Agreement made and entered into as of December 4, 2009, by and among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding Inc., as lender, and the Federal Reserve Bank of New York (filed as an exhibit to the Form 8-K filed on December 7, 2009 and incorporated herein by reference).
  10.13     Amendment to Schedules of Certain Loan Documents made and entered into as of December 15, 2009, by and among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.)

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Exhibit
     
Number
   
Description
 
  10.14     Amendment No. 2 to Schedules of Certain Loan Documents made and entered into as of January 29, 2010, by and among International Lease Finance Corporation, certain subsidiaries of International Lease Finance Corporation named therein, AIG Funding Inc., as lender, the Federal Reserve Bank of New York and Wells Fargo Bank Northwest, National Association, as trustee. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.)
  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 Active Chief Executive Officer, President and Chief Operating Officer.
  31.2     Rule 13a-14(a)/15d-14(a) Certification of Vice Chairman, Chief Financial Officer and Chief Accounting Officer.
  32.1     Certification under 18 U.S.C., Section 1350.

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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 income, shareholders’ equity and cash flows present fairly, in all material respects, the consolidated 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company’s 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.
 
As discussed in Note A, the Company is dependent upon securing additional sources of financing and the continued financial support of AIG to meet its obligations as they come due.
 
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
 
February 28, 2010


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
(Dollars in thousands, except share and per share amounts)
 
                 
    December 31,  
    2009     2008  
 
ASSETS
Cash, including interest bearing accounts of
$324,827 (2009) and $2,382,068 (2008)
  $ 336,911     $ 2,385,948  
Restricted cash, including interest bearing accounts of $246,115 (2009)
    315,156        
Notes receivable, net of allowance
    112,060       81,327  
Net investment in finance and sales-type leases
    261,081       301,759  
                 
Flight equipment under operating leases
    57,718,323       55,372,328  
Less accumulated depreciation
    13,788,522       12,152,189  
                 
      43,929,801       43,220,139  
Deposits on flight equipment purchases
    163,221       568,549  
Lease receivables and other assets
    477,218       478,944  
Derivative assets, net
    190,857       88,203  
Variable interest entities assets
    79,720       98,746  
Deferred debt issue costs — less accumulated amortization of
$146,933 (2009) and $131,527 (2008)
    101,017       91,899  
                 
    $ 45,967,042     $ 47,315,514  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accrued interest and other payables
  $ 474,971     $ 441,656  
Current income taxes
    80,924       32,083  
Tax benefit sharing payable to AIG
    85,000       85,000  
Loans from AIG Funding
    3,909,567        
Debt financing, net of deferred debt discount of
$9,556 (2009) and $18,919 (2008)
    24,802,172       31,476,668  
Subordinated debt
    1,000,000       1,000,000  
Foreign currency adjustment related to foreign currency denominated debt
    391,100       338,100  
Security deposits on aircraft, overhauls and other deposits
    1,469,956       1,527,884  
Rentals received in advance
    315,154       299,961  
Deferred income taxes
    4,881,558       4,478,250  
Variable interest entities liabilities
    6,464       10,699  
Commitments and contingencies — Note L
               
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
    603,542       600,237  
Accumulated other comprehensive (loss) income
    (138,206 )     (168,065 )
Retained earnings
    6,931,258       6,039,459  
                 
Total shareholders’ equity
    8,550,176       7,625,213  
                 
    $ 45,967,042     $ 47,315,514  
                 
 
See accompanying notes.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
(Dollars in thousands)
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
REVENUES:
                       
Rental of flight equipment
  $ 5,275,219     $ 4,943,448     $ 4,587,611  
Flight equipment marketing
    (11,687 )     46,838       30,613  
Interest and other
    58,209       98,260       111,599  
                         
      5,321,741       5,088,546       4,729,823  
                         
EXPENSES:
                       
Interest
    1,365,490       1,576,664       1,612,886  
Effect from derivatives, net of change in hedged items due to changes in foreign exchange rates
    (21,450 )     39,926       5,310  
Depreciation of flight equipment
    1,959,448       1,864,730       1,736,277  
Provision for overhauls
    346,966       264,592       290,134  
Flight equipment rent
    18,000       18,000       18,000  
Selling, general and administrative
    196,675       183,356       152,331  
Other expenses
    60,445       46,557        
                         
      3,925,574       3,993,825       3,814,938  
                         
INCOME BEFORE INCOME TAXES
    1,396,167       1,094,721       914,885  
Provision for income taxes
    500,538       391,596       310,519  
                         
NET INCOME
  $ 895,629     $ 703,125     $ 604,366  
                         
 
See accompanying notes.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
(Dollars in thousands)
 
                                                                 
    Market Auction
                      Accumulated
             
    Preferred Stock     Common Stock           Other
             
    Number
          Number
                Comprehensive
             
    of
          of
          Paid-in
    Income
    Retained
       
    Shares     Amount     Shares     Amount     Capital     (Loss)     Earnings     Total  
 
Balance at December 31, 2006
    1,000       100,000       45,267,723       1,053,582       591,757       2,718       4,826,941       6,574,998  
Common stock dividends
                                                    (38,000 )     (38,000 )
Preferred stock dividends
                                                    (5,346 )     (5,346 )
Comprehensive Income:
                                                               
Net income
                                                    604,366       604,366  
Other comprehensive income:
                                                               
Cash flow derivative transactions (net of tax of $58,565)
                                            (108,762 )             (108,762 )
Change in unrealized appreciation securities available-for-sale (net of tax of $94)
                                            (175 )             (175 )
                                                                 
Comprehensive income
                                                            495,429  
Other(a)
                                    1,698                       1,698  
                                                                 
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 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 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  
Common stock dividends
                                                               
Preferred stock dividends
                                                    (3,830 )     (3,830 )
Comprehensive Income:
                                                               
Net income
                                                    895,629       895,629  
Other comprehensive 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 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  
                                                                 
 
 
(a)  We recorded $1,698 in Paid-in Capital during 2007, $6,782 during 2008 and $3,305 during 2009 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.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
(Dollars in thousands)
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
OPERATING ACTIVITIES:
                       
Net income
  $ 895,629     $ 703,125     $ 604,366  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation of flight equipment
    1,959,448       1,864,730       1,736,277  
Deferred income taxes
    387,230       376,416       446,655  
Derivative instruments
    (57,141 )     680,816       (292,426 )
Foreign currency adjustment of non-US$ denominated debt
    114,620       (507,050 )     503,600  
Amortization of deferred debt issue costs
    40,232       31,325       30,229  
Amortization of prepaid lease cost
    51,899       51,108       52,624  
Write-off of notes receivable
          46,557        
Aircraft valuation adjustments
    60,445              
Other, including foreign exchange adjustments on foreign currency denominated cash
    (9,939 )     (28,274 )     (331 )
Changes in operating assets and liabilities:
                       
Lease receivables and other assets
    (13,417 )     (63,333 )     51,707  
Accrued interest and other payables
    10,478       1,382       28,440  
Current income taxes
    48,841       170,488       309,938  
Tax benefit sharing payable to AIG
                (160,000 )
Rentals received in advance
    15,193       48,580       28,068  
Unamortized debt discount
    9,363       13,651       4,322  
                         
Net cash provided by operating activities
    3,512,881       3,389,521       3,343,469  
                         
INVESTING ACTIVITIES:
                       
Acquisition of flight equipment under operating leases
    (2,577,410 )     (3,236,848 )     (4,705,376 )
Payments for deposits and progress payments
    (40,444 )     (290,748 )     (485,234 )
Proceeds from disposal of flight equipment — net of (loss) or gain
    196,934       390,868       186,912  
Advances on notes receivable
          (43,854 )      
Restricted cash
    (315,156 )            
Collections on notes receivable
    15,999       9,885       17,607  
Collections on finance and sales-type leases — net of income amortized
    90,241       20,900       55,774  
Other
    (10 )           5,749  
                         
Net cash used in investing activities
    (2,629,846 )     (3,149,797 )     (4,924,568 )
                         
FINANCING ACTIVITIES:
                       
Net change in commercial paper
    (1,752,000 )     (2,746,555 )     1,740,908  
Loan from AIG
    3,900,000       1,671,268        
Repayment of loan to AIG
          (1,671,268 )      
Proceeds from debt financing
    1,394,868       9,389,394       3,783,374  
Payments in reduction of debt financing
    (6,388,347 )     (4,754,551 )     (4,146,181 )
Debt issue costs
    (49,350 )     (23,092 )     (23,702 )
Payment of common and preferred dividends
    (3,830 )     (55,887 )     (39,086 )
Customer deposits
    (34,107 )     156,165       289,038  
                         
Net cash (used in) provided by financing activities
    (2,932,766 )     1,965,474       1,604,351  
                         
Net (decrease) increase in cash
    (2,049,731 )     2,205,198       23,252  
Effect of exchange rate changes on cash
    694       (2,022 )     2,400  
Cash at beginning of year
    2,385,948       182,772       157,120  
                         
Cash at end of year
    336,911     $ 2,385,948     $ 182,772  
                         
 
(Table continued on following page)


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                       
Cash paid (received) during the year for:
                       
Interest, excluding interest capitalized of $10,360 (2009), $26,597 (2008), and $37,192 (2007)
  $ 1,370,585     $ 1,548,492     $ 1,606,049  
Income taxes, net
    13,754       (155,305 )     (286,763 )
 
                         
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 aircraft’s 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 aircraft’s 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 F 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.
2007:
                       
$640,981 of Deposits on flight equipment purchases was applied to Acquisition of flight equipment under operating leases.
$127,458 was reclassed from Security and other deposits to Deposits on flight equipment 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 $74,426.
Certain credits from aircraft and engine manufacturers in the amount of $41,680 reduced the basis of Flight equipment under operating leases and increased Lease receivables and other assets.
$9,120 of Notes receivable and $5,529 of Lease receivable and other assets were exchanged for Flight equipment of $14,649.
 
See accompanying notes.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
(Dollars in thousands)
 
Organization:  International Lease Finance Corporation (the “Company,” “ILFC,” “management,” “we,” “our,” “us”) is primarily engaged in the leasing of commercial jet aircraft to airlines throughout the world. In addition to our leasing activity, we regularly sell aircraft from our leased aircraft fleet and aircraft owned by others to third party lessors and airlines and in some cases provide fleet management services to these buyers. 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. AIG’s primary activities include both general and life insurance and retirement services operations. Other significant activities include financial services.
 
Note A — Consideration of ILFC’s Ability to Continue as a Going Concern:
 
Current Situation
 
We have historically depended on our access to the public debt markets and bank loans in addition to our operating cash flows, to finance the purchase of aircraft and repay our maturing debt obligations. Due to a combination of the challenges facing AIG, the downgrades in our credit ratings by the rating agencies, and the turmoil in the credit markets, we have been unable to access the commercial paper markets since the third quarter of 2008, we currently have limited access to the unsecured debt markets, and the maximum amount available under our senior revolving credit facilities is outstanding.
 
We cannot determine if the commercial paper market will be available to us again, or when we will be able to issue unsecured debt. During 2009, we entered into two credit agreements aggregating $3,900,000 with AIG Funding, Inc. (“AIG Funding”), a non-subsidiary related party, to assist in funding our liquidity needs, including the repayment of our obligations under our $2,000,000 revolving credit agreement that matured on October 15, 2009. The credit agreements are secured by a portfolio of aircraft and other assets related to the pledged aircraft. We also increased the total amount available under our 2004 Export Credit Agency (“ECA”) facility by $1,000,000 in May 2009 and at February 25, 2010, we had approximately $682,000 available under that facility to use for purchases of new Airbus aircraft through June 2010, provided we receive consent from the security trustee, as required with our current long-term debt ratings.
 
Under AIG’s credit facility and guarantee and pledge agreement with the Federal Reserve Bank of New York (“FRBNY”), we are, as a subsidiary of AIG, subject to the covenants under the FRBNY Credit Agreement. Additionally, in the fourth quarter of 2009, we entered into two credit agreements with AIG Funding that also contain restrictive covenants. The covenants in these credit agreements restrict, among other things, our ability to:
 
  •  incur debt;
 
  •  encumber our assets;
 
  •  dispose of certain assets;
 
  •  enter into sale-leaseback transactions;
 
  •  make equity or debt investments in other parties;
 
  •  make capital expenditures; and
 
  •  pay dividends and distributions.
 
These covenants may affect our ability to operate and finance our business as we deem appropriate.
 
Under our existing public debt indentures and bank loans, we and our subsidiaries are permitted to incur secured indebtedness totaling up to 12.5% of consolidated net tangible assets, as defined in such debt agreements, which is currently approximately $4,733,000. Therefore, we can currently incur additional secured financings totaling approximately $800,000 under these existing debt agreements, provided we receive any required consents


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note A — Consideration of ILFC’s Ability to Continue as a Going Concern (Continued)
 
from the FRBNY. Furthermore, it may be possible, subject to receipt of required consents from AIG Funding, the FRBNY, and the lenders under our bank loans, for us to obtain secured financing without regard to the 12.5% consolidated net tangible asset limit referred to above (but subject to certain other limitations) by doing so through subsidiaries that qualify as non-restricted subsidiaries under our public debt indentures. We will need to seek relief from our bank lenders with regard to the 12.5% limitation. We cannot predict whether the banks, AIG Funding, or the FRBNY will consent to us incurring additional secured debt.
 
We will need additional sources of financing in excess of the secured financings, and we may need to seek additional funding from AIG, which funding would be subject to the consent of the FRBNY.
 
Management’s Plans
 
Because we cannot determine if the commercial paper market will be available to us or when the unsecured debt markets may become fully available to us again, we are currently seeking other ways to fund our aircraft purchase commitments and future maturing obligations.
 
We are currently seeking the following sources of funding:
 
  •  We intend to continue to seek financing available under our 2004 ECA facility. At December 31, 2009, we had approximately $682,000 available for the financing of Airbus aircraft under our 2004 ECA facility. As a result of our current long-term debt ratings, we are required to receive written consent from the security trustee before we can fund future Airbus aircraft deliveries. We obtained consent for 19 of the 24 Airbus aircraft we purchased since March 17, 2009, when the security trustee’s consent became required. We financed the 19 aircraft under the facility during 2009, and subsequent to December 31, 2009, we obtained consent for and expect to finance the remaining five aircraft delivered in the fourth quarter of 2009 in March 2010.
 
  •  We are currently seeking secured financings aggregating $750,000 from various institutions. Under our existing debt agreements we and our subsidiaries have certain restrictions, as mentioned above, and currently have approximately $800,000 available to us for additional secured financings.
 
  •  We are currently pursuing potential aircraft sales that could aggregate up to $3,500,000 in proceeds. Significant uncertainties exist regarding whether we could reach an agreement with buyers, what the terms of any potential sale would be and whether the FRBNY would approve any agreement reached by our Board of Directors. Because the current market for aircraft is depressed due to the economic downturn and limited availability of buyer financing, a sale would likely result in a realized loss, which could be material to our results of operations for an individual reporting period. If the sales portfolios on offer result in sales, there will be an aging of the ILFC aircraft fleet. The portfolios are not cross sections of the ILFC aircraft fleet, but consist of primarily younger aircraft.

The FRBNY collateral pool is very large and consists of younger, in production aircraft. The FRBNY must approve all sales and secured borrowing, other than borrowing under the 2004 ECA facility. We cannot predict how this will impact the timing and conclusion of any potential sales.
 
As stated in AIG’s annual report on Form 10-K for the period ended December 31, 2009, AIG intends to provide support to us through February 28, 2011, to the extent that secured financing, aircraft sales and other sources of funds are not sufficient to meet liquidity needs.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note A — Consideration of ILFC’s Ability to Continue as a Going Concern (Continued)
 
Management’s Assessment and Conclusion
 
In assessing our current financial position, liquidity needs and ability to meet our obligations as they come due, management made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:
 
  •  credit ratings downgrade risk which could further reduce our ability to access public debt markets and our private debt;
 
  •  financing requirements for future debt repayments and aircraft purchase commitments;
 
  •  the potential financing sources discussed above;
 
  •  cash flows from operations, including potential non-performance of lessees and the mitigation of such impact on revenue due to repossession rights, security deposits and overhaul rentals; and
 
  •  cash flows generated from potential sales of aircraft portfolios and any uncertainties associated with those sales.
 
Based on AIG’s expressed intention to support us, its recent funding of $2,200,000 to us to repay our maturing debt, and management’s plans as described above, and after consideration of the risks and uncertainties of such plans, management believes we will have adequate liquidity to finance and operate our business and repay our obligations for at least the next twelve months.
 
It is possible that the actual outcome of one or more of management’s plans could be materially different or that one or more of management’s significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.
 
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, nor relating to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.
 
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. The primary beneficiary of a VIE is the party with variable interest in the 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. See Note M — 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.
 
Variable Interest Entities:  We consolidate VIEs in which we have determined that we are the Primary Beneficiary (“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 all significant Variable Interests when certain events occur. The re-evaluation occurs when an event changes the manner in which the Variable Interests are allocated across the


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
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. We do not reconsider whether we are a PB solely as the result of operating losses incurred by an entity.
 
Lease Revenue:  We lease flight equipment principally under operating leases and report rental income ratably over the life of the lease. The difference between the rental income recorded and the cash received under the provisions of the lease is included in Lease receivables and other assets on the Consolidated Balance Sheets. Past-due rentals are recognized on the basis of management’s assessment of collectibility. Management monitors all lessees that are behind in lease payments and discusses relevant operational and financial issues facing 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. In certain cases, leases provide for additional rentals 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 lessee typically reports the usage to us monthly.
 
Lease revenues from the rental of flight equipment have been reduced by payments received by our customers from the notional accounts established by the aircraft and engine manufacturers.
 
Rentals received under the lease agreements but unearned are recorded in Rentals received in advance on the Consolidated Balance Sheets until earned.
 
Lessee specific modifications such as those related to modifications of the aircraft cabin are capitalized as initial direct costs and amortized over the term of the lease into lease revenue.
 
Initial Direct Costs:  We treat as period costs internal and other costs incurred in connection with identifying, negotiating and delivering aircraft to our lessees. Amounts paid by us to lessees, or other parties, in connection with the lease transactions are capitalized and amortized as a reduction to lease revenue over the lease term.
 
Flight Equipment Marketing:  We market flight equipment both on our behalf and on behalf of independent third parties. Flight equipment marketing consists of revenue 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.
 
Provision for Overhauls:  Under the provisions of many 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 for usage of the aircraft.
 
Overhaul rentals are included under the caption Rental of flight equipment in the Consolidated Statements of Income. We provide a charge to operations for estimated reimbursements at the time the lessee pays the overhaul rentals based on overhaul rentals received and the estimated reimbursements during the life of the lease. Management periodically evaluates the reserve for these reimbursements and the reimbursement rate, and adjusts the provision for overhauls accordingly.
 
Cash:  We consider cash and cash equivalents to be cash on hand and highly liquid investments with maturity dates of 90 days or less. At December 31, 2009, cash and cash equivalents consist of cash on hand and time deposits. At December 31, 2008, cash and cash equivalents consist of cash on hand, time deposits, deposits in funds that purchase U.S. government securities, and overnight interest bearing sweep accounts. In addition, an escrow account with a deposit of $458,547 is included in our cash balances at December 31, 2008. The amount was designated by the Board of Directors to pay off the FRBNY Commercial Paper Funding Facility (“CPFF”) and was subsequently used together with other funds to pay off the $1,700,000 borrowed under the CPFF. See Note F — Debt Financing.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
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. See Note F — Debt Financing.
 
Foreign Currency:  Assets and liabilities denominated in foreign currencies are translated into USD using the exchange rates at the balance sheet date. Foreign currency transaction gains or losses are translated into USD at the transaction date.
 
Flight Equipment:  Flight equipment under operating leases is stated at cost. Purchases, major additions and modifications and interest on deposits during the construction phase are capitalized. The lessee provides and pays for normal maintenance and repairs, airframe and engine overhauls, and compliance with return conditions of flight equipment on lease.
 
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 on the straight-line basis to a zero residual value over its useful life of 35 years. We had ten and 13 freighter aircraft in our fleet at December 31, 2009 and 2008, respectively. When an aircraft is out of production, management evaluates the aircraft type and depreciates the aircraft using the straight line method over a 25-year life from the date of manufacture to an established residual value for each aircraft type.
 
Under arrangements with 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. The amounts credited are recorded as a reduction in Flight equipment under operating leases with a corresponding charge 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, 2007, we had closed one notional account and at December 31, 2009 we had closed an additional notional account and were in the process of closing the remaining accounts. Future amounts paid to us by the manufacturers will be recorded directly as a reduction to Flight equipment under operating leases.
 
Management evaluates all contemplated aircraft sale transactions as to whether all the criteria required have been met under GAAP in order to classify the aircraft as held for sale. Management uses judgment in evaluating these criteria. Due to the uncertainties and uniqueness of any potential sale transaction, the criteria generally will not be met for an aircraft as held for sale unless the aircraft is subject to an approved signed sale agreement or management has made a specific determination to sell a particular aircraft or group of aircraft.
 
At the time assets are retired or sold, the cost and accumulated depreciation are removed from the related accounts and the difference, net of proceeds, is recorded as a gain or loss.
 
Management evaluates quarterly the need to perform a recoverability assessment as required under U.S. Generally Accepted Accounting Principles (“GAAP”) and performs a recoverability assessment of all aircraft in our fleet at least annually. An assessment is performed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Further, we may perform a recoverability assessment if changes in circumstances would require us to change our assumptions as to future cash flows. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. The undiscounted cash flows consist of cash flows from currently contracted leases, future projected lease rates and estimated residual values, scrap values or sale values as appropriate for each aircraft.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
Management is very active in the industry and develops the assumptions used in the recoverability assessment based on its knowledge of active lease contracts, expectations of intended use of a particular aircraft, 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 factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in, among other things, contracted lease rates, economic conditions, technology, airline demand for a particular aircraft type, and other risk factors. In the event that an aircraft does not meet the recoverability test, 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 monitoring the aircraft in our fleet for impairment charges, 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.
 
Capitalized Interest:  We borrow funds to finance progress payments for the construction of flight equipment ordered. We capitalize 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 debt issue costs in connection with debt financing. Those costs are deferred and amortized over the life of the debt using the interest method and charged 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. All derivatives are carried at fair value. We obtain our market 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, the gain or loss on the mark-to-market of the derivative is either recognized in income along with the change in market value of the item being hedged for fair value hedges, or deferred 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.
 
We formally document all relationships between hedging instruments and hedged items at designation of the hedge, as well as risk management objectives and strategies for undertaking various hedge transactions. This includes linking all derivatives that are designated as fair value, cash flow, or foreign currency hedges to specific assets or liabilities on the balance sheet. We also assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flow of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We use the “hypothetical derivative method” when we assess the effectiveness. When it is determined that a derivative 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 is amortized into income over the remaining life of the derivative contract.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
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. 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. See Note N — Fair Value Measurements for more information on fair value.
 
Other Comprehensive Income (Loss): We report comprehensive income or loss for gains and losses associated with changes in fair value of derivatives designated as cash flow hedges and unrealized gains and losses on marketable securities classified as “available-for-sale.”
 
Guarantees:  We record 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 have to perform under a guarantee, we accrue a separate liability, if it is reasonably estimable, based on the facts and circumstances at that time. We reverse the liability only when there is no further exposure under the guarantee.
 
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 realizable in AIG’s consolidated return. To the extent the benefit of a net operating loss is not utilized in AIG’s tax return, AIG will reimburse us upon the expiration of the loss carry forward period as long as we are still included in AIG’s 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 AIG’s current taxes resulting from our inclusion in AIG’s 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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
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 AIG’s share-based payment and liability award programs and our share of the calculated costs is allocated to us by AIG. AIG accounts for stock-based compensation using the modified prospective application method. This method provides for the recognition of the fair value with respect to share-based compensation for shares subscribed for or granted on or after January 1, 2006, and all previously granted but unvested awards as of January 1, 2006. The cost is recognized over the period during which an employee is required to provide service in exchange for the options. See Note K — Employee Benefit Plans.
 
Use of Estimates:  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.
 
Reclassifications:  Certain amounts have been reclassified in the 2008 and 2007 financial statements to conform to our 2009 presentation.
 
Recent Accounting Pronouncements:
 
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 percent 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 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 income. 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 income. 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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
instruments; (ii) how derivative instruments and related hedged items are accounted for; and (iii) how derivative instruments and related hedged items affect a company’s 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 O — Derivative Financial Instruments.
 
Employers’ Disclosures about Postretirement Benefit Plan Assets:  In December 2008, the FASB issued an accounting standard that requires more detailed disclosures about an employer’s plan assets, including the employer’s 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 K — 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 company’s 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 M — 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. 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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note B — Summary of Significant Accounting Policies (Continued)
 
consolidated financial position, results of operations or cash flows. We considered subsequent events through March 1, 2010 for disclosures in this Form 10-K, which is the date the financial statements were available to be issued.
 
FASB Accounting Standards Codification:  In June 2009, the FASB issued an accounting standard that established the FASB Accounting Standards Codification (“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 U.S. Securities and Exchange Commission (“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 P — Fair Value Disclosures of Financial Instruments.
 
Future Application of Accounting Standards:
 
Accounting for Transfers of Financial Assets:  In June 2009, the FASB issued an accounting standard addressing transfers of financial assets that 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. The new standard is effective for interim and annual periods beginning on January 1, 2010 for us. Earlier application is prohibited. The adoption of the new standard will have no effect on our consolidated financial position, results of operations, or cash flows, as we do not have any involvement with QSPEs.
 
Consolidation of Variable Interest Entities:  In June 2009, the FASB issued an accounting standard that amends the rules addressing 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 entity’s 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 is effective for interim and annual periods beginning on January 1, 2010. Earlier application is prohibited. We have determined that we are not involved with any VIEs that would have to be consolidated as a result of the adoption of this standard. We have determined that we will have to deconsolidate ten previously consolidated VIEs, as we do not control the activities which significantly impact the economic performance of these VIEs. Accordingly, we will remove Assets of VIEs and Liabilities of VIEs from our consolidated balance sheet of $79,720 and $6,464, respectively, as reflected on our Consolidated Balance Sheet at December 31, 2009. We will record investments in senior secured notes of $51,660 and guarantee liabilities of $3,000 relating to our involvements with these entities. As a result, we will record a $15,900 charge, net of tax, to beginning retained earnings on January 1, 2010.
 
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 is effective for us for


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
interim and annual periods ending after June 15, 2010. Because this new standard only requires additional disclosures, its adoption will have no effect on our consolidated financial position, results of operations, or cash flow.
 
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 G — Shareholders’ Equity.
 
Credit Agreements with AIG Funding:  We borrowed $1,671,268 from AIG Funding, an affiliate of our parent, in September 2008 in order to pay our commercial paper and other obligations as they became due. The amount outstanding under the loan was paid in October 2008 when we were approved to participate in the CPFF.
 
During the year ended December 31, 2009, we entered into credit agreements aggregating approximately $3,900,000 with AIG Funding. See Note F — Debt Financings.
 
Derivatives and Insurance Premiums:  All of our interest rate swap and foreign currency swap agreements are with AIG Financial Products Corp. (“AIGFP”), a related party. See Note N — Fair Value Measurements and Note O — Derivative Financial Instruments. In addition, we purchase insurance through a broker who may place part of our policies with AIG. Total insurance premiums were $6,806, $5,745, and $5,100 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Our financial statements include the following amounts involving related parties:
 
                         
    December 31,  
Income Statement
  2009     2008     2007  
    (Dollars in thousands)  
 
Expense (income):
                       
Interest expense on loan from AIG
  $ 100,504     $ 6,825     $  
Effect from derivatives on contracts with AIGFP(a)
    (22,097 )     39,926       5,310  
Lease revenue related to hedging of lease receipts with AIGFP(a)
    723       6,718       (799 )
Allocation of corporate costs from AIG
    8,683       13,167       12,877  
Management fees received
    (9,457 )     (9,808 )     (9,878 )
Management fees paid to subsidiaries of AIG
    910       839       726  
 
                 
    December 31,  
Balance Sheet
  2009     2008  
    (Dollars in thousands)  
 
Asset (liability):
               
Loans from AIG Funding
  $ 3,909,567     $  
Derivative assets, net(a)
    186,771       88,203  
Income taxes (payable) receivable to/from AIG
    (80,924 )     (32,083 )
Taxes benefit sharing payable to AIG
    (85,000 )     (85,000 )
Accrued corporate costs payable to AIG
    (5,298 )     (6,092 )
Accrued interest payable to AIG
    (672 )      
Net (payable) receivable for management fees and other
          (3 )
 
 
(a)  See Note O — Derivative Financial Instruments for all derivative transactions


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
 
Note D — Notes Receivable
 
Notes receivable are primarily from the sale of flight equipment and are summarized as follows:
 
                 
    2009     2008  
 
Fixed rate notes with varying interest rates up to 10.3%
  $ 52,060     $ 6,767  
LIBOR based notes with spreads ranging from 1.3% to 3.3%
    60,000       74,560  
                 
    $ 112,060     $ 81,327  
                 
 
At December 31, 2009, the minimum future payments on notes receivable are as follows:
 
         
2010(a)
  $ 67,161  
2011
    8,865  
2012
    8,937  
2013
    11,834  
2014
    15,263  
         
    $ 112,060  
         
 
 
(a)  Includes a balloon payment for a note related to a sale of flight equipment.
 
During the year ended December 31, 2008, based on information received and the analysis performed, we recorded charges aggregating $46,557 to write down two secured notes to fair value. There were no material write downs of notes receivables during the years ended December 31, 2009 and 2007.
 
Note E — Net Investment in Finance and Sales-type Leases
 
The following lists the components of the net investment in finance and sales-type leases:
 
                 
    December 31,
    December 31,
 
    2009     2008  
 
Total lease payments to be received
  $ 171,549     $ 165,503  
Estimated residual values of leased flight equipment (unguaranteed)
    138,665       195,737  
Less: Unearned income
    (49,133 )     (59,481 )
                 
Net investment in finance and sales-type leases
  $ 261,081     $ 301,759  
                 
 
At December 31, 2009, minimum future lease payments on finance and sales-type leases are as follows:
 
         
2010
  $ 39,323  
2011
    32,333  
2012
    32,040  
2013
    24,526  
2014
    21,596  
Thereafter
    21,731  
         
Total minimum lease payments to be received
  $ 171,549  
         


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note C — Net Investment in Finance Leases (Continued)
 
 
Note F — Debt Financing
 
Our debt financing was comprised of the following at the following dates:
 
                 
    December 31,  
          2009           2008  
 
Secured
               
ECA Financings
  $ 3,004,763     $ 2,436,296  
Loans from AIG Funding
    3,909,567        
Other Secured Financings(a)
    153,116        
                 
      7,067,446       2,436,296  
Unsecured
               
Commercial Paper
          1,752,000  
Public Bonds and Medium-Term Notes
    16,566,099       19,748,541  
Bank Debt
    5,087,750       7,558,750  
                 
      21,653,849       29,059,291  
                 
Total Secured and Unsecured Debt Financing
    28,721,295       31,495,587  
Less: Deferred Debt Discount
    (9,556 )     (18,919 )
                 
      28,711,739       31,476,668  
Subordinated Debt
    1,000,000       1,000,000  
                 
    $ 29,711,739     $ 32,476,668  
                 
 
 
(a)  Of this amount, $129,583 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. 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.
 
ECA Financings
 
Export Credit Facilities:  We entered into ECA facilities in 1999 and 2004. The 2004 ECA facility is currently used to fund purchases of Airbus aircraft, while new financings are no longer available to us under the 1999 ECA facility. The loans made under the ECA facilities are used to fund a portion of each aircraft’s net purchase price.
 
In January 1999, we entered into the 1999 ECA facility to borrow up to $4,327,260 for the purchase of Airbus aircraft delivered through 2001. We used $2,800,000 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%. The loans are guaranteed by various European Export Credit Agencies. We have collateralized the debt by a pledge of the shares of a wholly-owned subsidiary that holds title to the aircraft financed under the facility. At December 31, 2009, 32 loans with an aggregate principal value of $146,111 remained outstanding under the facility and the net book value of the related aircraft was $1,780,011.
 
In May 2004, we entered into the 2004 ECA facility, which was amended in May 2009 to allow us to borrow up to $4,643,660 for the purchase of Airbus aircraft delivered through June 30, 2010. Funds become available under this facility when the various European Export Credit Agencies provide guarantees for aircraft based on a forward looking calendar. The financing is for a ten-year fully amortizing loan per aircraft at an interest rate determined through a bid process. We have collateralized the debt by a pledge of the shares of a wholly-owned subsidiary that


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note F — Debt Financing (Continued)
 
holds title to the aircraft financed under this facility. As of December 31, 2009, we had financed 66 aircraft using approximately $3,961,381 under this facility and approximately $2,858,652 was outstanding. The interest rates are either fixed or based on LIBOR. At December 31, 2009, the interest rates of the outstanding loans ranged from 0.45% to 4.71%. The net book value of the related aircraft was $3,990,970 at December 31, 2009.
 
Under the terms of our 1999 and 2004 ECA facilities, our current long-term debt ratings impose the following restrictions: (i) we must receive written consent from the security trustee before we can fund Airbus aircraft deliveries under the 2004 ECA facility; (ii) we must segregate all security deposits, maintenance reserves and rental payments received under the leases of the aircraft financed under the 1999 and 2004 ECA facilities into separate accounts controlled by the security trustees (segregated rental payments will be used to pay principal and interest on the outstanding debt); and (iii) we must file individual mortgages on the aircraft funded under the 1999 and 2004 ECA facilities in the local jurisdictions in which the respective lessees operate. At December 31, 2009, we had segregated security deposits, maintenance reserves and rental payments aggregating $315,156 related to aircraft funded under the 1999 and 2004 ECA facilities.
 
Loans from AIG Funding
 
In March 2009 we entered into two demand note agreements aggregating $1,700,000 with AIG Funding in order to fund our liquidity needs. Interest on the notes was based on LIBOR with a floor of 3.5%. On October 13, 2009, we amended and restated the two demand note agreements, including extending the maturity dates, and entered into a new $2,000,000 credit agreement with AIG Funding. We used the proceeds from the $2,000,000 loan to repay in full our obligations under our $2,000,000 revolving credit facility that matured on October 15, 2009. On December 4, 2009 we borrowed an additional $200,000 from AIG Funding to repay maturing debt. The amount was added to the principal balance of the new credit agreement. These loans, aggregating $3,900,000, mature on September 13, 2013 and are due in full at maturity with no scheduled amortization. The loans initially bore interest at a rate of 3-month LIBOR plus 3.025%, which was subsequently raised to 6.025%, as discussed below. The funds for the loans were provided to AIG Funding by the FRBNY pursuant to the FRBNY Credit Agreement. In order to receive the FRBNY’s consent to the loans, we entered into guarantee agreements to guarantee the repayment of AIG’s obligations under the FRBNY Credit Agreement up to an amount equal to the aggregate outstanding balance of the loans.
 
These loans (and the related guarantees) are secured by (i) a portfolio of aircraft and all related equipment and leases, with an aggregate average appraised value as of September 30, 2009 of approximately $7,400,000 plus additional temporary collateral with an aggregate average appraised value as of September 30, 2009 of approximately $10,000,000 that will be released upon the perfection of certain security interests, as described below; (ii) any and all collection accounts into which rent, maintenance reserves, security deposits and other amounts owing are paid under the leases of the pledged aircraft; and (iii) the shares or other equity interests of certain subsidiaries of ours that may own or lease the pledged aircraft in the future. In the event the appraised value of the collateral held falls below certain levels, we will be forced either to prepay a portion of the term loans without penalty or premium, or to grant additional collateral.
 
We are also required to prepay the loans, without penalty or premium, upon (i) the sale of an aircraft (other than upon the sale or transfer to a co-borrower under the loans) in an amount equal to 75% of the net sale proceeds; (ii) the receipt of any hull insurance, condemnation or other proceeds in respect of any event of loss suffered by a pledged aircraft in an amount equal to 75% of the net proceeds received on account thereof; and (iii)  the removal of an aircraft from the collateral pool (other than in connection with the substitution of a non-pool aircraft for such removed aircraft in accordance with the terms of the loans) in an amount equal to 75% of the most recent appraised value of such aircraft. We are also required to repay the loans in full upon the occurrence of a change in control,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note F — Debt Financing (Continued)
 
which is defined in the loan agreements to include AIG ceasing to beneficially own 100% of our equity interests. We may voluntarily prepay the loans in part or in full at any time without penalty or premium.
 
The loans contain customary affirmative and negative covenants and include restrictions on asset transfers and capital expenditures. The loans also contain customary events of default, including an event of default under the loans if an event of default occurs under the FRBNY Credit Agreement. One event of default under the loans was the failure to perfect security interests, for the benefit of AIG Funding and the FRBNY, in certain aircraft pledged as collateral by December 1, 2009. We were unable to perfect certain of these security interests in a manner satisfactory to the FRBNY by December 1, 2009, and as a result entered into temporary waivers and amendments which (i) will allow us to release the temporary collateral of approximately $10,000,000 once we have completed the transfer of all the aircraft pledged as security to special purpose entities and perfected the security interests of all such aircraft for the benefit of AIG Funding and the FRBNY; (ii) required us to add certain aircraft leasing subsidiaries as co-obligors on the loans; and (iii) will require us to transfer pledged aircraft to special purpose entities within a prescribed time period (not less than three months from the date of notice) upon request, at any time, by AIG Funding (the “Transfer Mandate”). Pursuant to the temporary waiver and amendment, until all perfection requirements with regard to the pledged aircraft have been satisfied, the interest rate was raised to three-month LIBOR plus 6.025%, of which 3.0% is permitted to be paid-in-kind and is added to the principal balance of the loans. Additionally, if we do not comply with any Transfer Mandate within the prescribed time period, we will be in default under the loan agreements with AIG Funding and the interest rate may increase to three-month LIBOR with a 2% floor plus 9.025%. As of February 25, 2010, the FRBNY had not presented us with any Transfer Mandate. Within 30 days after our compliance with the perfection requirements for all of the pledged aircraft, including the transfer of all such aircraft to special purpose entities, a pool of aircraft with a 50% loan-to-value ratio will be selected by AIG Funding and the FRBNY from the pledged aircraft, and the additional temporary collateral with an aggregate appraised value of approximately $10,000,000 at September 30, 2009 will be released.
 
Other Secured Financing Arrangements
 
In May 2009, ILFC provided $39,000 of subordinated financing to an entity, which we have determined is a VIE of which we are the primary beneficiary. The primary beneficiary of a VIE is the party with the variable interest in the 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. See Note M — Variable Interest Entities. Accordingly, we consolidate the entity into our consolidated financial statements. The entity used these funds and an additional $106,000 borrowed from third parties to purchase an aircraft, which the entity leases to an airline. ILFC acts as servicer of the lease for the entity. The $106,000 loan has two tranches. The first tranche is $82,000, fully amortizes over the lease term, and is non-recourse to ILFC. The second tranche is $24,000, 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 have nine-year terms with interest rates based on LIBOR. At December 31, 2009, the interest rates on the $82,000 and $24,000 tranches were 3.385% and 5.085%, 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, 2009, $100,631 was outstanding and the net book value of the aircraft was $142,071.
 
In June 2009, we borrowed $55,449 through a wholly-owned subsidiary that is considered a VIE and owns one aircraft leased to an airline. See Note M — Variable Interest Entities. The loan is non-recourse to ILFC and the loan is secured by the aircraft and the lease receivables. The interest rate on the loan is fixed at 6.58%. At December 31, 2009, $52,485 was outstanding and the net book value of the aircraft was $94,610.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note F — Debt Financing (Continued)
 
  Commercial Paper and Other Short-Term Debt
 
Commercial Paper:  We have a $6,000,000 Commercial Paper Program. The weighted average interest rate of our outstanding commercial paper was 3.51% at December 31, 2008.
 
We became unable to issue new commercial paper in September 2008 as a result of the liquidity issues of our parent, AIG, the downgrading of our short-term debt rating, and the overall economic conditions in the U.S. and global credit markets. As a result, in September 2008 we had to borrow $1,671,268 from AIG Funding, an affiliate of our parent, and subsequently draw down the maximum amount available on our unsecured revolving credit facilities of $6,500,000. Since September 12, 2008, except as discussed below, we have not issued new commercial paper and we cannot determine if the commercial paper markets will be available to us again.
 
Commercial Paper Funding Facility:  On October 27, 2008, we were approved to participate in the CPFF to issue up to $5,700,000 of commercial paper. As of December 31, 2008, we had issued $1,686,900 under the CPFF. The proceeds were used to repay the amount outstanding under our loan from AIG Funding. The commercial paper issued was due January 28, 2009 and we paid a lending rate of 2.78%. On January 21, 2009, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc., downgraded our long-term and short-term credit ratings and we ceased to have access to the CPFF. We repaid the funds borrowed under the CPFF on its maturity date of January 28, 2009.
 
Other Short-Term Financing:  In April 2009, we entered into a $100,000 90-day promissory note agreement with a supplier in connection with the purchase of an aircraft. The interest rate was fixed at the annual rate of 5.00%. The note was paid in full on July 22, 2009, when it matured.
 
  Public Bonds and Medium-Term Notes
 
As of December 31, 2009, we had one effective U.S. shelf registration statement and a Euro Medium-Term Note Programme:
 
                 
    Maximum
    Issued as of
 
    Offering     December 31, 2009  
 
Registration statement dated August 7, 2009
  $ Unlimited (a)   $  
Euro Medium-Term Note Programme dated September 2009(b)(d)
    7,000,000       1,903,000 (c)
 
(a)  As a result of our Well Known Seasoned Issuer (“WKSI”) status, we have an unlimited amount of debt securities registered for sale.
 
(b)  This is a perpetual program. As a bond issue matures, the principal amount of that bond becomes available for new issuances under the program.
 
(c)  We have hedged the foreign currency risk of the notes through foreign currency swaps.
 
(d)  This is a perpetual program. As a bond issue matures, the principal amount of that bond becomes available for new issuances under the program.
 
Prior to September 2008, we had issued bonds and medium-term notes. At December 31, 2009, we had public bonds and medium-term notes in the amount of $16,566,099 outstanding with maturities ranging from 2010 to 2015 and interest rates ranging from 4.20% to 7.95%. The bonds and 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, 2009 and 2008 we had floating rate notes aggregating $1,350,000 and $4,073,280 and the remainder 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.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note F — Debt Financing (Continued)
 
At December 31, 2009 and 2008, bonds and medium-term notes included $1,902,500 and $2,334,200 of notes, respectively, issued under our $7,000,000 Euro Medium-Term Note Program (€1.6 billion in 2009 and €1.9 billion and £300 million in 2008). The program is perpetual. As a bond issue matures, the principal amount of that bond becomes available for new issuances under the program. We have eliminated the currency exposure arising from the notes by hedging the notes through swaps. 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 $391,100 and $338,100 at December 31, 2009 and 2008, respectively.
 
  Bank Debt
 
Revolving Credit Facilities:  We previously entered into three unsecured revolving credit facilities with an original group of 35 banks for an aggregate amount of $6,500,000, consisting of a $2,000,000 tranche that expired and was paid in full in October 2009, a $2,000,000 tranche that expires in October 2010, and a $2,500,000 tranche that expires in October 2011. These revolving credit facilities provide for interest rates that vary according to the pricing option selected at the time of borrowing. Pricing options include a base rate, a rate ranging from 0.25% over LIBOR to 0.65% over LIBOR based upon utilization, or a rate determined by a competitive bid process with the banks. The credit facilities are subject to facility fees, currently 0.2% of amounts available. We are currently paying the maximum fees under the facilities. The fees are based on our current credit ratings and may decrease in the event of upgrades to our ratings. As of December 31, 2009, the maximum amount available of $4,500,000 under our active revolving credit facilities was outstanding and interest was accruing on the outstanding loans with interest rates based on LIBOR ranging from 0.91% to 0.93%. If AIG sells 51% or more of our equity interests without our lenders’ consent, it would be an event of default under our revolving credit facilities and would allow our lenders to declare our debt immediately due and payable.
 
Term Loans:  From time to time, we enter into funded bank financing arrangements. As of December 31, 2009, $587,750 was outstanding under these term loan agreements, which have varying maturities through February 2012. The interest rates are based on LIBOR with spreads ranging from 0.30% to 0.40%. At December 31, 2009, the interest rates ranged from 0.55% to 0.68%. If AIG sells 51% or more of our equity interests without our lenders’ consent, it would be an event of default under our funded bank financing agreements and would allow our lenders to declare our debt immediately due and payable.
 
  Subordinated Debt
 
In December 2005, we issued two tranches of subordinated debt totaling $1,000,000. Both tranches mature on December 21, 2065, but each tranche has a different call option. The $600,000 tranche has a call option date of December 21, 2010, and the $400,000 tranche has a call option date of December 21, 2015. The tranche with the 2010 call option date has a fixed interest rate of 5.90% for the first five years, and the tranche with the 2015 call option date has a fixed interest rate of 6.25% for the first ten years. Each tranche has an interest rate adjustment if the call option for that tranche is not exercised. The new interest rate would be a floating rate, reset quarterly, based on the initial credit spread of 1.55% and 1.80%, respectively, plus the highest of (i) 3 month LIBOR; (ii) 10-year constant maturity treasury; or (iii) 30-year constant maturity treasury.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note F — Debt Financing (Continued)
 
  Existing Commitments
 
Maturities of debt financing (excluding deferred debt discount) at December 31, 2009 are as follows:
 
         
2010
  $ 6,650,317  
2011
    7,653,642  
2012
    4,132,508  
2013
    7,863,355  
2014
    1,469,474  
Thereafter
    1,951,999  
         
    $ 29,721,295  
         
 
  Other
 
Under the most restrictive provisions of our debt agreements, consolidated retained earnings at December 31, 2009 in the amount of $2,542,765 are unrestricted as to payment of dividends based on consolidated net tangible worth requirements. We are, however, currently restricted from paying any dividends to AIG under the FRBNY Credit Agreement.
 
Note G — Shareholders’ Equity
 
  Market Auction Preferred Stock
 
The Market Auction Preferred Stock (“MAPS”) have a liquidation value of $100 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. At December 31, 2009, the dividend rate for each of the Series A and Series B MAPS was 0.44%.
 
  Paid-in Capital
 
We recorded $3,305 in 2009, $6,782 in 2008, and $1,698 in 2007 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 income consists of fair value adjustments 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 market values obtained from AIG. The fair value of marketable securities were determined using quoted market prices.
 
At December 31, 2009 and 2008, the Company’s accumulated other comprehensive (loss) income consisted of the following:
 
                 
    2009     2008  
 
Cumulative unrealized (loss) gain related to cash flow hedges, net of tax of $74,566 (2009) and $90,497 (2008)
  $ (138,482 )   $ (168,065 )
Cumulative unrealized gain related to securities available for sale, net of tax of $149 (2009)
    276        
                 
Total accumulated other comprehensive (loss) income
  $ (138,206 )   $ (168,065 )
                 


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note G — Shareholders’ Equity (Continued)
 
 
Note H — Rental Income
 
Minimum future rentals on non-cancelable operating leases and subleases of flight equipment which has been delivered as of December 31, 2009 are shown below. This does not include the rentals to be received from lessees as a result of payments made to them directly by the aircraft manufacturers.
 
         
Year Ended
     
 
2010
  $ 4,670,327  
2011
    4,170,938  
2012
    3,473,153  
2013
    2,725,381  
2014
    2,072,724  
Thereafter
    3,736,884  
         
    $ 20,849,407  
         
 
Additional rentals we earned based on the lessees’ usage aggregated $689,949 in 2009, $616,747 in 2008, and $645,535 in 2007. Flight equipment is leased, under operating leases, with remaining terms ranging from one to 11 years.
 
Unamortized initial direct cost of $85,292 and $81,793 at December 31, 2009 and 2008, respectively, is included in Lease receivables and other assets on our Consolidated Balance Sheets.
 
Note I — Income Taxes
 
The provision (benefit) for income taxes is comprised of the following:
 
                         
    2009     2008     2007  
Current:
                       
Federal(a)
  $ 110,579     $ 14,527     $ (145,650 )
State
    1,467       (557 )     7,209  
Foreign
    1,262       1,210       2,305  
                         
      113,308       15,180       (136,136 )
Deferred(b):
                       
Federal
    379,813       370,968       455,569  
State(c)
    7,417       5,448       (8,914 )
                         
      387,230       376,416       446,655  
                         
    $ 500,538     $ 391,596     $ 310,519  
                         
 
(a)  Including U.S. tax on foreign income.
 
(b)  Deferred taxes were also provided (charged) to other comprehensive income of $(16,078), $33,302, and $58,659 for the years ended December 31, 2009, 2008, and 2007, respectively.
 
(c)  Includes a charge of $3,669 in 2009, a charge of $1,080 in 2008, and a benefit of $12,854 in 2007 for revaluation of state deferred taxes as a result of a change in our California apportionment factor.


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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands)
 
Note I — Income Taxes (Continued)
 
The net deferred tax liability consists of the following deferred tax liabilities (assets):
 
                 
    2009     2008  
Deferred Tax Liabilities
               
                 
Accelerated depreciation on flight equipment
  $ 5,394,198     $ 4,951,176  
Straight line rents
    37,586       39,565  
Derivatives
    14,381       10,260  
Other
    1,970       2,211  
                 
Total Deferred Tax Liabilities
  $ 5,448,135     $ 5,003,212  
                 
Deferred Tax Assets
               
Excess of state income taxes not currently deductible
  $ (17,668 )   $ (14,709 )
Provision for overhauls
    (137,997 )     (148,139 )
Capitalized overhauls
    (64,628 )     (30,214 )
Rent received in advance
    (92,129 )     (80,233 )
Other comprehensive income
    (74,419 )     (90,497 )
Accruals and reserves
    (85,008 )     (55,545 )
Net operating loss carry forward(a)
    (58,899 )     (75,386 )
Losses of VIEs
    (29,281 )     (23,756 )
Other
    (6,548 )     (6,483 )
                 
Total Deferred Tax Assets(b)
  $ (566,577 )   $ (524,962 )
                 
Net Deferred Tax Liability
  $ 4,881,558     $ 4,478,250  
                 
 
(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.
 
A reconciliation of the computed expected total provision for income taxes to the amount recorded is as follows: