AIG Shares Fall Further, Put Pressure on Treasury

By and | May 10, 2011

Later this month investors will get a chance to buy into the revived American International Group, but dreams of a blockbuster sale have faded with the steady decline in AIG’s shares.

The stakes are high for the U.S. Treasury, which owns 92 percent of AIG after bailing out the insurer multiple times during and after the financial crisis.

Selling shares at a loss would be a black eye for Treasury, but the government is under pressure to exit its crisis-era investments in private companies and raise as much money as it can before it runs up against borrowing limits.

While AIG has been profitable two quarters running, the profits depended on asset sales.

The company still faces a slew of questions from investors and analysts about growth in its underlying businesses and its ability to compete without the support of the government.

Those questions are putting pressure on the Treasury as it starts a roadshow to sell some of the stock to investors.

“Right now they’re in a very tough spot just because the stock price has moved the way that it has,” a source familiar with the situation said. But there are investors who are willing to pay a fair price for the shares, that person added.

The dreams of fat government profits started last year when AIG, the Treasury and the Federal Reserve negotiated a complicated deal to recapitalize the company, buy out the New York Fed and leave the Treasury with 1.66 billion shares in what had been the world’s largest insurer.

The government provided as much as $182 billion of support to AIG during and after the financial crisis, and the plan was to sell AIG back to the public at a handsome profit for taxpayers.

On Jan. 20, 2011, after the company completed the last piece of its recapitalization, AIG shares opened at a price that would have given the Treasury a profit of $27.1 billion.

Then the stock fell. And fell. Between the open on Jan. 20 and the close on May 9, the stock lost 34 percent of its value. Over the same period, S&P insurance shares and the broader S&P 500 index both rose.

As of late morning Tuesday, the Treasury’s potential profit was less than $1.1 billion as the stock dropped to $29.15, its lowest in almost eight months.

With both credit and equity analysts wary about AIG’s prospects, that profit could be squeezed further still.

A LONG WAY

“We caution that there is very little (earnings) visibility, and execution risk remains high,” Standard & Poor’s equity analyst Cathy Seifert wrote in a note to clients last week, even as she raised her rating to “buy” on valuation.

Gimme Credit debt analyst Kathleen Shanley, in a note Tuesday, said that while AIG as a company had turned itself around, there were still issues with property insurance unit Chartis and aircraft leasing business ILFC that could hold it back.

“AIG has come a long way since it played a starring role in the global financial crisis of 2008,” Shanley said. “Incremental improvements may come more slowly given the challenges facing Chartis and ILFC,” she added, keeping an “underperform” opinion on the company’s bonds.

One thing is clear: no one has any idea yet where the stock’s bottom is.

A second source familiar with the process said the offering would probably carry a discount in the mid-single digit percentage range relative to AIG’s last closing price.

That would put the AIG sale roughly on par with the government’s sale of Citigroup stock last December.

Amid reports of infighting between the Treasury and its bankers on the price, a third source familiar with the situation said last week there was little point in speculating on a final price until the roadshow took place, adding that the market price was a good guide for valuing the stock.

But one investor said this week that portfolio managers believe there would be demand somewhere between $23 and $25 per share, and that the Treasury could easily sell at least 20 percent of it AIG stake at those prices. On an adjusted basis, the last time AIG traded as low as $23 was early March 2010.

At $25, and including both the Treasury’s shares and AIG’s own primary offering, that would imply a deal of at least $11 billion in size. If nothing else, that would serve to significantly broaden AIG’s float.

As it stands, 95.35 percent of AIG shares sit with three holders — the government, Bruce Berkowitz’s Fairholme Capital Management and former AIG CEO Hank Greenberg’s Starr International.

They and others may be represented on Wednesday, when AIG holds its annual meeting at the company’s new headquarters in downtown Manhattan.

(Editing by Ted Kerr)

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