AIG's Exchange Offer Under-Tendered - Analyst Blog

On November 23, American International Group Inc. (AIG) announced the completion of its equity units exchange offering, whereby the company will exchange 4.9 million shares for 49.5 million corporate units by paying $161.8 million. However, this was only about two-third of the total 74.48 million of corporate units initially intended to be exchanged, leaving 28.9 million units outstanding.

Previously, AIG had also extended the expiry to November 23 from November 17, which was again postponed from November 10, given the inadequate tender for the exchange offering.

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 November 17, thereby extended the deadline further.

However, even the extension of the expiry date failed to complete the exchange offer of the corporate units, thereby raising scepticism on AIG's successful and timely implementation of the recapitalization program.

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 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) were acting as dealer managers for the exchange offer.

While it is expected that the Treasury may earn 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 for stabilizing 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 to the companies.

 
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