AIG Postpones Equity Unit Offering - Analyst Blog

Briskly moving ahead with its recapitalization program, on Wednesday, American International Group Inc. (AIG) announced a further extension of 74.48 million of its equity units exchange offering to November 23.

With the commencement of the exchange on October 8, AIG had scheduled the expiry of the exchange offering to be on November 10, but on this day it was postponed to November 17, marking the current extension as the second one in line.

On October 8, AIG offered 74.48 million of its equity units, wherein every equity unit consists of a corporate unit worth 0.09867 shares of AIG common stock and $3.27 in cash, representing about 95% of the outstanding corporate units. However, the company has been able to tender only about 42.6 million of the corporate units until Wednesday, thereby extending the deadline further.

This exchange offer is in accordance with the implementation of the recapitalization program where the U.S. Federal Reserve has agreed to divert AIG's TARP loan obligations towards the U.S. Treasury. In turn, the Treasury will convert $49.1 billion of preferred shares held with the government to about 1.7 billion shares of AIG's common stock at a discounted price.

Post the exchange offering, the Treasury is still expected to hold about 92% of AIG's common stock, the complete offload of which is not expected before the first quarter of 2011, after converting its preferred interests. Only after this, the before the government can begin selling AIG shares.

BofA Merrill Lynch of Bank of America Corp. (BAC), Citi of Citigroup Inc. (C) and Deutsche Bank Securities of Deutsche Bank AG (DB) are acting as dealer managers for the exchange offer.

While it is expected that the Treasury may profit about $22 billion from the sale of AIG's securities, we believe the projection is too good to be credible currently, given the government's time frame of 5-8 years before it can completely sell off its stock and exit AIG's board.

However, the recapitalization program comes as a crucial, fast but risky step for AIG since the company has already used most of the other sources such as asset disposals to accumulate funds in an attempt to repay the $182.5 billion of the government bailout loan. As of September 30, 2010, AIG owed the U.S. government an outstanding debt and equity balance of $95.6 billion.

Hence,the decision to convert the various ownership interests of the U.S. government to common stock, which will ultimately be sold to public investors, appears to be an essential step to be taken for stabilization of AIG. The company is the only insurer left to repay its TARP loan, whereas Hartford Financial Services Group Inc. (HIG) and Lincoln National Corp. (LNC) have already repaid their bailouts and the Treasury raised more than $900 million by selling warrants in the companies.

 

Although these actions will result in streamlining AIG's operations and the debt reduction will strengthen its balance sheet, the company's ratings lay exposed to the risk of being heavily dependent on the U.S. government's support, which also includes the availability of significant liquidity.

 

Going forward, we believe that AIG will now have to stand on its own feet once again, while maintaining ample liquidity and re-establish itself in the industry. This is also important to restore shareholder confidence.

 
AMER INTL GRP (AIG): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
DEUTSCHE BK AG (DB): Free Stock Analysis Report
 
HARTFORD FIN SV (HIG): Free Stock Analysis Report
 
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
 
Zacks Investment Research