Fortress to Buy Majority of AIG Consumer Finance Unit

By and | August 12, 2010

American International Group Inc is selling most of its consumer finance unit to Fortress Investment Group at a deep discount and will recognize a $1.9 billion pretax loss as a result.

AIG, majority owned by the U.S. government, said Wednesday it will sell 80 percent of American General Finance to Fortress, a hedge fund and private equity firm, as it restructures after a bailout.

It will retain the rest of the business, hoping to benefit if American General does well under Fortress.

AIG and Fortress did not disclose terms of the transaction. But a source close to the deal said Fortress was paying a “very small fraction” of the equity value of the business.

Another source said the purchase price was more than $100 million. Last week, AIG said it valued its investment in the unit at $2.4 billion.

AIG said in a regulatory filing reporting the sale that it will recognize the $1.9 billion loss in the third quarter.

In doing the deal, Fortress is making a bet it will be able to take advantage of a demand-supply imbalance in the market for consumer loans to people with credit problems and the economy will not tank once again.

Credit availability for subprime consumers has shrunk, with banks like HSBC and Citigroup Inc pulling out of that business and lenders facing regulatory pressures to make loans to credit-worthy borrowers.

American General Finance, with some 1,200 branches, is one of the largest consumer finance companies in the United States and difficult to replicate, the sources said, declining to be named because the plan is not public.

Its reach and contact with borrowers also mean its loans are faring better than those of its peers, they said.

American General’s 60 day-plus delinquency rate on loans to people with credit problems is about 9 percent, compared with 30 percent to 35 percent for the industry, one of the sources said.

New York-based Fortress plans to reduce the unit’s leverage, including through restructuring debt and asset sales, and has the time to do so, the source said.

American General Finance raised a $3 billion loan earlier this year, which gave it enough liquidity to meet its obligations over two years, the second source said.

The sale process, which started in February, saw as many as 10 firms do due diligence, the source said, adding that in the end it came down to two bidders and was wrapped up a week ahead of schedule.

The companies expect the deal to close by the end of the first quarter of 2011.

American General Finance has assets of $20 billion and liabilities of $18 billion. It reported an operating loss of $11 million for the second quarter Friday, compared with a loss of $202 million a year ago. The loss narrowed because favorable trends in credit quality led to a drop in the provision for loan losses.

Bank of America was the sole adviser for AIG on the deal, while Weil, Gotshal & Manges served as legal counsel. Skadden Arps served as legal counsel to Fortress.

Moody’s Investors Service lowered the unit’s corporate family rating and bank loan, saying the sale “results in a lower expectation of support from AIG,” Reuters Loan Pricing Corp reported.

American General’s new term loan eased about 50 basis points to 99-99.5, sources told RLPC.

Fortress, one of only a few publicly traded hedge fund groups, was involved in a similar deal earlier this year when some of its funds bought European assets from Ally Financial’s Residential Capital unit.

In has made other recent acquisitions. It bought bond manager Logan Circle Partners for $21 million and announced a deal in July for loan servicing firm CWCapital.

Still, Fortress’s share price has been a disappointment for investors since it debuted at $18.50 in 2007. On Wednesday, the share price fell 3.8 percent to $4.03.

AIG, once the world’s largest insurer, nearly collapsed in September 2008 from credit default swaps that left it on the hook for tens of billions of dollars in payouts to some of the biggest U.S. and European banks.

It has been selling assets to repay taxpayers, whom it still owes more than $100 billion.

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