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Basking after a good first-quarter performance, yesterday American International Group Inc. (AIG - Analyst Report) announced the US Treasury will vend off shares worth about $5.0 billion of the company, which were held by the latter, in an attempt to reduce its stake in the company.
In this third round of stock sale, the Treasury has offered to buyback about 163.9 million shares for an average price of $30.50, modestly above the Treasury’s break-even of $28.73 per AIG share, thereby totalling $5.0 billion.
While AIG intends to repurchase 65.6 million shares for $2.0 billion, the remaining $3.0 billion worth of stock will be raised through open market operations. Besides the $5.0 billion stock offering, the underwriters are granted an option of buying another 24.6 million shares for $750 million.
The US government has appointed Bank of America Corp. (BAC), Barclays Plc (BCS - Snapshot Report), Deutsche Bank AG (DB - Analyst Report), Goldman Sachs Group Inc. (GS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Macquarie Group Ltd., UBS AG (UBS - Analyst Report), Wells Fargo & Co. (WFC - Analyst Report), Morgan Stanley (MS - Analyst Report), Credit Suisse AG (CS - Snapshot Report) and Citigroup Inc. (C - Analyst Report) as book-runners of the stock offering.
The total $5.0 billion of stock sale will, in turn, reduce the Treasury’s stake in the company to 63% from 70%, while the Treasury will still own about 1.25 billion shares of AIG. The Treasury’s stake was previously reduced from 77% to 70% in March this year, by shedding 206.9 million shares at $29 per share thus totaling $6.0 billion. Preceding this, Treasury’s stake was reduced from 92% in May 2011 through AIG’s first secondary stock offering, wherein the former earned about $8.7 billion by selling stock worth $200 million.
The Treasury and the Federal Reserve (Fed) together hold about $44 billion of investment in AIG, thereby reducing the burden of the $182.3 billion bailout loan taken by the company in September 2008. Hence, the earnings of $5.0 billion will further reduce the government loan on AIG to about $39 billion.
Fed Sheds AIG’s RMBS
Separately, the Fed also announced on Friday the sale of a chunk of its residential mortgage-backed securities (RMBS) in Maiden III LLC, an investment portfolio that contains collateralised debt obligations (CDOs) that were held by AIG’s counterparties to protect themselves against default, and which were bought by the Fed in 2008 to terminate credit default swaps (CDS) issued by AIG.
Accordingly, the Fed has offered nine banks to submit their bids by May 10, for a part of Maiden III portfolio, known as the Triaxx CDOs, which are primarily comprised of subprime home loan bonds. These banks include Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Nomura of Nomura Holdings Inc. and Royal Bank of Scotland plc (RBS - Snapshot Report). BlackRock Solutions has been appointed as the investment manager for Maiden III and will also be executing the sale of three Triaxx CDOs.
As of March 31, 2012, Triaxx CDOs in Maiden Lane III was valued at $2.5 billion These CDOs, however, have been have been the subject of a pending lawsuit filed by AIG.
AIG’s main bond portfolio is valued at more than $250 billion and includes corporate debt, mortgage-backed assets and municipal securities. Meanwhile, late last month, the Fed had sold two other CDOs from the Maiden Lane III portfolio, carrying a face value of $7.5 billion, to Barclays and Deutsche Bank. Recently, even AIG bought $600 million worth of Maiden III securities from the Fed.
Overall, amid the current low interest rate environment when the fixed-income investments yield lower returns, such high-yielding risk structured securities are once again emerging as lucrative investment options. The lucrative sale of Maiden II earlier this year spurs optimism for the future regarding a profitable sale of Maiden Lane III.
High Growth Impetus, Outlook Neutral
Given the steep acceleration in AIG’s stock price in the recent months along with an impressive first quarter financial results, we believe that the Treasury may likely shed off its stake in the company sooner-than-expected, while also generating modest returns out of this investment. AIG’s stock price shored up by about 41.5% so far this year and is expected to continue its momentum.
Last week, AIG reported its first-quarter 2012 operating earnings per share of $1.65, which outpaced the Zacks Consensus Estimate of $1.04 as well as year-ago quarter’s earnings of $1.34 per share. Consequently, operating net income surged 43.8% to $3.1 billion from $2.09 billion in the year-ago quarter. Results reflected improved top line along with enhanced operating performance across business operations.
The business restructuring process since the past couple of years has enabled AIG to focus on quality insurance and investment products and services. Besides, lower catastrophe losses also improved the combined ratio, while stability was retained through premiums’ growth in Chartis, stability at International Lease Finance Corp. (ILFC) and higher assets under management (AUM) in SunAmerica. These factors also drove the book value per share and return on equity (ROE).
However, AIG’s liquidity to buyback the agreed $2.0 billion stock raises some caution, as the company may have to raise further debt to fund the repurchase, which implies increased financial leverage and added pressure on the recovering financial state of the company.
Moreover, volatile equity markets, widening credit spreads and reduced interest rates continue to showcase declines in the estimated future cash flows and persistently pressurize margins. Hence, we maintain a long-term Neutral outlook on AIG with Zacks Rank #3, which also implies a short-term Hold rating.