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AIG, Fed Choose Four Banks to Take Lead Role in the Sale of Insurer's Shares

Source: Wall Street

Posted on 19 Jan 2011

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The Wall Street Journal is reporting that J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and Deutsche Bank AG were picked from a pool of 10 banks that last week pitched for lead roles in the historic share sale of American International Group (AIG).

The fee that banks have been asked to accept on the coming offering is about 0.5%, or $5 million on every $1 billion in shares sold, according to the people. It isn't clear if all the banks have accepted that figure, which would be below the 0.75 percentage point fee that banks charged on last year's initial public offering of General Motors Co.

Still, the potential size of the AIG sale—which bankers last week predicted could exceed $20 billion and could potentially rank as the biggest offering in U.S. history—could make the assignment lucrative to the banks. If $25 billion in AIG shares are sold, banks stand to collect $125 million at a 0.5% fee.

With the lead underwriters picked, the banks and AIG are expected to start mapping out a strategy for marketing the company's shares at investor roadshows in the coming weeks. To sell all the government's shares, they will have to get many large investors—such as mutual funds, pension funds and other institutions—to buy AIG's stock in the coming months.

AIG shares dropped 83 cents or 1.54% to $53.17 in 4 p.m. New York Stock Exchange trading on Tuesday. The shares are expected to drop into the $40s this week after the company distributes warrants to its private shareholders.

The selection of four banks to co-lead the offering underscores the complexity and challenge that lies ahead as AIG tries to win back favor with investors following its record government bailout and a lengthy restructuring.

In the GM IPO, Morgan Stanley and J.P. Morgan were initially chosen to lead the offering. Bank of America and Citigroup Inc. were later added to the slate of lead underwriters.

The U.S. now owns 92.1% of AIG following the closing of a recapitalization agreement last Friday that saw the insurer fully repay its obligations to the Federal Reserve Bank of New York, transfer preferred interests in certain assets to the Treasury, and convert preferred shares held by Treasury into 1.66 billion AIG common shares.

With potentially over $60 billion of shares to sell over the next year or more, the government's exit from AIG will ultimately give most large Wall Street banks a piece of the action.

The banks picked to co-lead the AIG share sale were selected on the basis of their experience and track records handling large stock offerings, their knowledge of the company and the insurance industry, and the strength of their distribution, among other factors, according to a person familiar with the matter.

J.P. Morgan and Bank of America recently arranged new unsecured credit lines for AIG, in which a total of 36 banks participated. Goldman, meanwhile, was a lead underwriter in last year's Hong Kong initial public offering of pan-Asian life insurer AIA Group Ltd, which enabled AIG to raise a larger than expected $20.5 billion to repay U.S. taxpayers.

Morgan Stanley, which advised the New York Fed throughout the AIG bailout, is expected to get a role in the AIG sales later on.

Some of the banks that are leading the AIG offering, including Goldman and Deutsche Bank, sale received billions of dollars in cash from the giant insurer after the 2008 bailout, in a controversial deal designed to stem AIG's cash bleed by tearing up mortgage-related contracts the banks and AIG previously entered into. That issue didn't factor into the selection of the banks, a person familiar with the matter said.