AIG Strong on Recapitalization Path - Analyst Blog

Moving a step ahead with its recapitalization plan, yesterday American International Group Inc. (AIG) announced a dividend of 10-year warrants worth $75 million, which will enable investors to purchase the company's common stock at $45 per share.

The declared dividend will be paid on January 19 to AIG's common shareholders of record as on January 13, 2011. However, the US Treasury is not eligible for receiving warrants in this arrangement. Meanwhile, the investors will receive about one warrant for every two shares owned.

Issuing warrants as dividend is an attempt by AIG to perk up the recapitalization program that was charted out by the US Federal Reserve in late September last year, since the company is yet to pay a huge chunk of the $182.3 billion government bailout loan taken in September 2008.

Last month, AIG also gave its thumbs up to execute the recapitalization plan. However, issuance of warrants via dividends is subject to the condition that the recapitalization program will close on January 14, 2011, which is less likely to happen.

Under the recapitalization program, the US federal government has planned to sell about 20% of its stake, or about 15 billion shares, of AIG by the first quarter of 2011. Hence, AIG has issued warrants as dividends so as to make a lucrative offer for non-government investors and execute the plan as per the schedule.

According to the proposed plan, the U.S. Federal Reserve Bank New York has agreed to divert AIG's TARP loan obligations toward 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.

Hence, with the expected closure of the recapitalization plan in the first quarter of 2011, AIG will be able to free the company from loan that it owes to the US Federal Reserve leaving the US Treasury with a 92% stake in the company. This holding will be sold over time depending on the performance of AIG's shares in the market.

Given the current buoyancy in the stock price at around $60, we believe this could prove to be a much rewarding transaction for public investors. Moreover, the disposition of redundant assets, the Nan Shan deal bidding over $3 billion, timely repayment of the line of credit to the US Federal Reserve, focus on core operations and the liquidity support from the US government, all offer potential growth prospects for AIG.

Further, with the implementation of the recapitalization program, AIG is once again eligible for raising money from the open market. The company issued notes worth $2 billion in the debt market at the end of November last year, in order to repay the US Federal Reserve's $20 billion credit line. Last month, the company also agreed to secure a $4.3 billion credit facility that will be made available upon the closing of the recapitalization plan.

As per the freshly laid terms, AIG will be able to execute up to two common stock offerings annually until the government stake fizzles down to below one-third. Also the company will now be able to raise up to $3 billion of equity in the market and an additional $4 billion with the Treasury's approval. The last time AIG had issued debt was in August 2008, when the company had vended about $3 billion in 10-year paper.

The proceeds from AIG's ALICO sale to MetLife Inc. (MET) and AIA IPO will be utilized to repay the line of credit extended to AIG by the FRBNY credit facility before the end of the first quarter of 2011. The company is also expected to use the proceeds from the culmination of its Nan Shan deal in Taiwan for repayment of the credit line with FRBNY. These factors and debt elimination initiatives again gather some optimism for long-term stability.

However, as of now, the rating agencies remain cautious of the final execution of the growth prospects and stable liquidity, going forward, thereby justifying the current negative outlook. Moreover, the risk of execution continues to hang around considering the company's credit default swap portfolio, pending asset sales and administrative disturbances within AIG. Several non-recurring charges, associated with the intense restructuring, are even expected to mar the desired upside in the upcoming quarters.

Overall, we believe that given the consideration that AIG has been working vigorously to attain liberation from the US government and to eliminate redundant operations in order to concentrate on its core global life and property-casualty insurance businesses, the company should finally be able to re-establish its capital and market position. However, such a recovery is a long-term story. Hence, the near-term outlook remains cautious and conservative given the uncertainty tied to the performance of AIG's debt offering in the market.

Accordingly, we also recommend an Underperform rating, with a Zacks #5Rank #5, on the stock.

 

On Thursday, the shares of AIG closed at $60.45, down 0.8%, on the New York Stock Exchange.

 
AMER INTL GRP (AIG): Free Stock Analysis Report
 
METLIFE INC (MET): Free Stock Analysis Report
 
Zacks Investment Research