AIG Divests, Aims for Recapitalization - Analyst Blog

Yesterday American International Group Inc. (AIG) announced that not only has it finalized the deal to dispose of its Nan Shan Life Insurance Co. in Taiwan, the company also aims to complete the recapitalization by the end of this week, keeping track with the scheduled time-frame.

AIG has accepted the bid from Ruen Chen Investment Holding Co. Ltd. (Ruen Chen) in order to divest its 97.57% stake in its Nan Shan unit, for a cash deal of $2.16 billion. Ruen Chen is a Taiwanese conglomerate led by Ruentex Group (80%) and Pou Chen Corp. (20%). While Ruentex Group deals in various businesses ranging from supermarkets to textiles, Pou Chen is a listed footwear manufacturer in Taiwan.

Through this deal, AIG has finally been able to shed a huge asset burden. The company managed to sell the unit on its second attempt, long after its decision in October 2009 and having faced ample predicaments in the process.  

Recapitalization on Track

The $2.16 billion earning from the Nan Shan divestment has also paved way for the complete repayment of the US Federal Reserve Bank New York's (FRBNY) $21 billion credit line. The repayment also includes the proceeds from AIG's ALICO sale to MetLife Inc. (MET) and AIA IPO, among other asset dispositions. The company also issued notes worth $2 billion in the debt market at the end of November last year, to fund the repayment.

Last week, AIG announced a dividend of 10-year warrants worth 75 million, which will enable non-government 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. The successful issuance of these warrants has enabled the investors to 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 FRBNY 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 finally geared up to execute the recapitalization plan. However, issuance of warrants via dividends was subject to the condition that the recapitalization program will close on January 14, 2011, which is now being executed as per schedule.

Under the recapitalization program, the US federal government had planned to sell about 20% of its stake or about 15 billion shares in AIG by the first quarter of 2011. Hence, AIG had 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 other conditions of the recapitalization plan, the FRBNY had 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 scheduled closure of the recapitalization plan by the end of this week, AIG will be able to free the company of all loans 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.

On the other hand, given the current buoyancy in the stock price at around $60, we are hopeful of more rewarding transactions both for the government and public investors. Further, implementation of the recapitalization program makes AIG once again eligible for raising money from the open market.

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 to almost one-third. The company will now also be able to raise up to $3 billion of equity in the market and an additional $4 billion with the Treasury's approval.

AIG also believes that the government will benefit massively from the company's bailout program. These factors and debt elimination initiatives again gather some optimism for long-term stability.

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, the risk of execution continues to hover 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 also expected to mar the desired upside in the upcoming quarters.

 
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