AIG Implements Recapitalization Plan - Analyst Blog

After much mulling over the past several weeks, yesterday American International Group Inc. (AIG) gave its thumbs up to execute the recapitalization plan for exiting the US taxpayers loan curriculum, as per the regulatory filing agreed and signed by the two parties. The US federal government has planned to sell about 20% of its stake or about 15 billion shares in AIG by the first quarter of 2011 under the recapitalization program.

Finally, AIG agreed to execute the recapitalization program, charted out by the US Federal Reserve in late September, since the company has yet to pay a huge chunk of the $182.5 billion government bailout loan taken in September 2008. Evaluation on this exorbitant debt also came from the credit rating agency, A.M. Best, who affirmed its issuer credit rating of “bbb” on AIG, reflecting a negative outlook.

According to the proposed plan, the U.S. Federal Reserve Bank New York (FRBNY) 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.

However, 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. This holding will be sold over time depending on the performance of AIG's shares in the market.

Accordingly, 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 had been able to tender only about 49.5 million of the corporate units for $161.8 million until November 23, even after extending the deadline twice. Last week, AIG also vended off $500 million in three-year notes and $1.5 billion in 10-year paper amid strong demand in the market.

Besides, the proceeds from the 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.

Moreover, the recapitalization program will now liberate AIG from the restrictions including raising debts and issuing stock, which is worth $2-3 billion in the open market. 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.

As of September 30, 2010, AIG owed the US government an outstanding debt and equity balance of $95.6 billion. Of this, the company had outstanding net borrowings under the FRBNY credit facility of $14.3 billion, and accrued interest and fees of $6.2 billion, while $14.9 billion remained available. Besides, the remaining available amount with the Treasury Department related to Series F Preferred Stock was $22.3 billion, at the end of September 2010.

 

On one hand, the government authorities were also mulling over the profitability of the agreement. It is believed that if the shares of AIG continue to trade equal or higher than the current levels, only then there's scope of a gain since the warrants of AIG carry a strike price of $30 per share. However, on completion of the recapitalization program, AIG will also receive warrants to purchase up to 75 million shares of AIG stock in 10 years at a price of $45 per share.

 

On the other side, it is a crucial, faster but riskier step for AIG since the company has already used most of the other sources such as asset disposals to accumulate funds. 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.

 

Overall, 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 the 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. Moreover, the company is vulnerable to be marred by several one-time charges associated with the business restructuring, in the upcoming quarters.

 

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
 
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METLIFE INC (MET): Free Stock Analysis Report
 
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