AIG's Nan Shan Attracts Bidders - Analyst Blog

After several impediments in the way of disposing American International Group Inc.'s (AIG) Nan Shan unit in Taiwan, the company is finally seeing some light at the end of the tunnel, with handful of Taiwan bidders showing refreshed interest to buy the unit. While the bidders, including Cathay Financial Holding Co., Chinatrust Financial Holding Co. and Ruentex Group, have already submitted there bids on Friday, Fubon Financial Holding Co. has also been expectedly invited by AIG to bid for the deal.

Further, yesterday the Commercial Times also reported that a consortium of investors is being built to bid for Nan Shan. This consortium comprises Primus Financial Holdings Ltd., Goldsun Development & Construction Co. and Transasia Airways Corp. The bids are in the range of $2.2 billion to $2.5 billion.

This is not the first attempt made by AIG to vend off its Nan Shan unit, a decision that was taken in October 2009. Previously in June 2010, the company made certain modifications to comply with China's government policies, in an attempt to perk up the divestment of its Nan Shan unit rolling, which was decided to be sold for about $2.2 billion to a Hong Kong-led consortium.

According to the modifications, AIG had agreed to set aside $325 million of the purchase price in an escrow account for a four-year period, which will be utilized from time to time to enhance and maintain Nan Shan's capital ratios. However, the parties to contract awaited the government's sanction on the deal.

The delay on the deal persisted ever since, whereby no news from the regulatory authorities came up. Besides, Taiwan's Investment Commission, which will have final say on the deal, had rejected the sale proposal of Nan Shan, in August 2010, to the interested parties, including Primus Financial, Fubon Financial and battery maker, China Strategic, thereby further delaying the sell off. Nevertheless, AIG officials recently entered into negotiations with these parties once again in order to materialize the deal at the earliest.

Despite the sound fundamentals of Nan Shan, which enjoys the third largest position as per market share in the Chinese insurance market with more than 4 million policy holders, regulatory authorities overall appear to be concerned about vending Nan Shan to Primus and China Strategic. Their apprehension is based on both the acquiring companies' inadequate experience to take over such a high profile business, initiating scepticism on their efficiency. These lingering thoughts appear to delay the proposed deal.

Given the steadfastness of AIG and the fresh bidding for Nan Shan at a fair price, it appears that the company may be able to seal a deal within its targeted time period of a couple of months. Concurrent with its third quarter earnings release, AIG had intimated its intention of disposing off Nan Shan by the end of 2011.

AIG has been working for the past several quarters to sell its unnecessary businesses in an effort to repay the bailout money. In the last couple of months, the company completed the successful IPO of AIG's AIA Group Ltd. while also disposing of other assets such as ALICO to MetLife Inc. (MET), Japan-based AIG Star and AIG Edison to Prudential Financial Inc. (PRU) and AGF to Fortress Investment Group LLC (FIG). Recently, AIG also announced its intention to vend its rail-car leasing wing, AIG Rail Service Inc.

Moreover, AIG's airplanes leasing unit, ILFC, is also posing recovery trends, thereby helping AIG regain its financial flexibility. ILFC was devoid of any further liquidity since it had borrowed the maximum loan amount until September 2008, under the revolving credit facility entered in October 2005. Finally, ILFC improved its liquidity position by more than $12.5 billion since March 2010 with the markets getting into a recovery mode. The company increased its liquidity by extension of its credit, vending off aircrafts and issuance of new debt through bonds and other debt securities. Through these measures, ILFC could ultimately pay off its $2 billion loan, and enhance its financial leverage.

 

Yesterday, ILFC also announced the sale of 10-year notes worth $1.0 billion, in order to increase its operating capacities and eliminate debt. This unit of AIG has already vended off $7.15 billion of debt in 2010, the current note issue being the third attempt to raise capital. The latest $1.0 billion notes carry a yield of 8.375% and a rating of “BB+” as assigned by Standard & Poor's, reflecting slightly below than the investment grade.

 

ILFC is badly stuck in a debt pool with $5.3 billion of debt due in 2011 and $6.2 billion maturing in 2012. Subsequently, this puts additional burden on AIG, which is struggling hard to restructure its operations and repay the government's bailout loan that was taken up in September 2008. Hence, we still remain concerned over AIG's timely business re-establishment and complete independence from the government.

 
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