AIG Issues Notes Worth $750M

According to a report from Thomson Reuters, American International Group Inc. ( AIG - Analyst Report ) recently vended off senior unsecured notes worth $750 million. The notes were issued through reopening of a similar $750 million offering that was completed on May 24, 2012, thereby increasing the size of debt issuance to $1.5 billion.

These long-term unsecured notes of $750 million were issued at a price of $101.942 and dated to mature on June 1, 2022. These callable 10-year fixed rate notes are projected to have a spread of 300 basis points (bps) over the US Treasuries, bearing a coupon rate of 4.875% and yield rate of 4.628%.

Interest on the notes will be payable semi-annually, in equal installments, commencing on December 1, 2012. Further, AIG appointed Citigroup Inc. ( C - Analyst Report ) and Goldman Sachs Group Inc. ( GS - Analyst Report ) as the joint book-running managers for the sale.

Earlier, in May this year, AIG had also issued another set of 10-year unsecured notes worth $750 million at an issue price of $99.077, scheduled to mature on June 1, 2022. Additionally, these notes were projected to have a spread of 325 bps over the US Treasuries, bearing a coupon rate of 4.875% and yield rate of 4.993%. Meanwhile, Barclays Capital of Barclays plc ( BCS - Snapshot Report ) , BNP Paribas, Citigroup and RBC acted as the joint book-running managers for the sale.

Besides, both the set of unsecured notes carry a rating of “Baa1,” “A-” and “BBB” from Moody’s Investor Service of Moody’s Corp. ( MCO - Analyst Report ) , Standards & Poor’s (S&P) and Fitch, respectively. These ratings cast a stable outlook on AIG’s debt.

AIG expects to utilize the proceeds from the notes sold for enhancing its operating leverage and for refinancing a debt that is due to mature in 2013. Meanwhile, all the prime three rating agencies remain confident about the strong market positions of AIG’s core operations, i.e. Chartis and SunAmerica Financial Group, coupled with the company’s capital flexibility and credit profile. Moreover, AIG is making consistent efforts to repay the government bailout loan, reducing it by about 83% till date.

AIG’s strategic asset divestments have also relieved it off the redundant operations, while also aiding the company to focus on its core property and casualty businesses. The company also enjoys a modest cash position with a pro-forma debt and financial leverage of about 14% and 20%, respectively, based on the steady balance sheet deleveraging over the past 12–18 months.

Going ahead, AIG may warrant a rating upgrade if it is able to maintain its total financial leverage below 30% and pre-tax interest coverage in high single digits, while simultaneously improving its credit curve and earnings potential from Chartis and SunAmerica.

Moreover, AIG’s fixed charge coverage improved to 6x at the end of first quarter of 2012 from 3.0x at 2011-end. The rating agencies are quite optimistic about the company’s core earnings and underwriting profitability for the rest of 2012.

Nevertheless, the rating agencies have raised concerns regarding AIG’s ability to reduce the volatility in reserves of non-life operations, which could in turn hamper underwriting profitability and earnings of the company. Additionally, any deterioration in the financial leverage could severely hit the credit profile and capital flexibility of the company. Hence, AIG requires keeping up a healthy credit and cash position despite the ongoing balance sheet deleveraging and debt repayments.

Overall, we believe that barring the macro-economic factors and interest rate volatility, AIG has the potential to liberate itself from the clutches of the government, while also being able to maintain a strong and competitive business profile in future. Currently, AIG carries a Zacks Rank #1 implying a short-term Strong Buy rating.