American International Group Inc. (AIG - Analyst Report) concluded the last week with the announcement of a 4-year credit facility worth $4.0 billion. Through this credit facility, the company attempts to restructure its capital for long-term stability.
Accordingly, AIG made certain alterations, whereby two of its credit facilities refinanced in October last year have been replaced with the latest $4.0 billion of credit. This modification has been made to provide greater flexibility to its finances, whereby funds from the credit facility can be accessed by both AIG and its subsidiaries, whenever required.
In October 2011, AIG had sanctioned two new bank credit facilities amounting $4.5 billion. While one of the credit facilities is worth $3.0 billion granted by banks for four years, the other one is worth $1.5 billion for a 364-day period. The 4-year facility also included a Letter of Credit (LoC) with a sub-limit of $1.5 billion.
Last year, the $4.5 billion credit facilities had replaced the credit facilities announced in December 2010. These bank credit facilities comprised of $3.182 billion credit facility and a $1.3 billion 364-day LoC for Chartis. The $3.182 billion credit facility was equally divided between a 3-year facility and a 364-day facility.
Meanwhile, the latest 4-year, $4.0 billion credit facility includes LoC with a sub-limit of $2.0 billion, higher than the prior limit of $1.5 billion. Additionally, about 34 banks have participated in this credit facility arrangement. Further, AIG appointed J.P. Morgan Securities LLC of JP Morgan Chase & Co. (JPM - Analyst Report) and Citigroup Global Markets Inc. of Citigroup Inc. (C - Analyst Report) as the lead arrangers on both facilities.
The new credit facilities have been acquired and replaced with the older ones in an effort to gain more capital flexibility along with more favourable terms and conditions. While the company is vigorously shedding the US Treasury’s stake in its board, AIG is also seeking better tools to gain financial elasticity for long-term sustainability.
Last month, the Treasury further reduced its stake in AIG to 15.9% from the prior 53.4%, by selling 553.8million shares in the open market, at $32.50, a share for $18.0 billion, of which 153.8 million shares were bought back by the company for $5.0 billion. The Treasury also raised an additional $2.7 billion by selling 83.1 million extra shares to the underwriters.
Overall, the Treasury has been able to earn about $197.4 billion from the $182.3 billion invested in AIG as a bailout loan in September 2008. Meanwhile, the remaining 15.9% stake is yet to generate additional profits. The improved capital, operating and financial outlook also bodes well for the ratings agencies. However, fresh regulatory challenges from the Federal Reserve upon the complete dilution of the Treasury’s stake are one of significant risks that lie in the future.
Hence, we maintain a long-term Neutral outlook on AIG with Zacks Rank #2, which implies a short-term Buy rating and indicates a slight upward pressure on the stock in the near term.