AIG Debt Sale Shows Insurer Still Under Pressure

By | December 2, 2010

AIG may be getting healthier, but it hasn’t fully recovered.

When AIG sold $2 billion of debt on Tuesday, it had to offer fat interest payments to investors. The extra yield it paid over Treasuries, a measure of how much credit risk investors see for the company, was about twice what insurer Prudential had to pay two weeks ago.

Despite U.S. government support — and an equal credit rating to Prudential, for example — debt investors are still cautious about AIG’s ability to pay back the roughly $100 billion it owes taxpayers. There are also concerns about the insurance business and a weak global economy, analysts said.

“AIG is obviously going to be somewhat penalized at this point, that was a given,” said Rob Haines, insurance analyst at debt research firm CreditSights.

But the fact that AIG was able to sell debt at all showed that investors have some faith that the company is climbing out of its hole, Haines said.

With the notes paying such a high yield, demand was strong Tuesday. Customers placed orders for more than three times as much debt as was for sale. On Wednesday, prices on the notes rose, with the gap against Treasuries narrowing by more than 0.1 percentage point.

Market players said some investors were drawn by the rare chance to get yields over 6 percent on investment-grade paper.

Yet S&P rated the new issue “A-” with a negative outlook, given questions about the company’s restructuring and the operating performance of its global property and casualty subsidiary Chartis.


The argument for caution on AIG stems largely from the extensive nature of its reorganization. The company has shed or is shedding the majority of its international operations to focus on two ongoing businesses: Chartis and domestic life insurer SunAmerica.

Both businesses are facing challenges from heavy competition, pressure on rates and lingering hesitancy among consumers to do business with the once-teetering firm.

Add the pressure of the government ultimately owning 92 percent of the company and the large debt premium becomes unsurprising, analysts said.

The sale was the first half of a two-part capital raise the company has planned, with a stock offering yet to come in the first quarter. That sale is expected to be in the neighborhood of $1.5 billion, given Tuesday’s result and Chief Executive Robert Benmosche’s goal of raising at least $3.5 billion.

“Strictly from the AIG point of view, they’ve gone to market earlier than they said they planned to as recently as a month ago. The fact that they can tap markets at all is a sign of confidence,” said Clark Troy, senior analyst at Aite Group.

There is already plenty of demand for the stock, which may feed into the as-yet unscheduled offering. Since the start of the year, the stock is up 37.7 percent, well outpacing a 6.3 percent gain for the S&P insurance index.

Smart money has been snapping up the shares, including Fairholme Capital Management, which would hold nearly 30 percent of AIG’s currently outstanding common stock if it converted all of its preferred shares.

But regardless of how the stock sale comes off, analysts said the debt sale was a much more crucial signpost in the company’s turnaround program.

“The fact AIG was able to raise the capital and tap the markets is an important part of that process,” said Mark Rouck, senior director at Fitch Ratings.

“That’s a characteristic of an investment-grade credit and a solid company, that’s kind of a milestone in their process to get there.”

(Reporting by Ben Berkowitz, additional reporting by IFR analyst Andrea Johnson, editing by Dave Zimmerman)

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