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AIG Plans to Replace One or More Banks in Next Offering

Source: WSJ - Serena Ng

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Posted on 11 Jul 2011

Reflecting dissatisfaction over the first sale in May, American International Group Inc. (AIG)  is planning to replace one or more Wall Street banks in a group of four managing its next sale of shares from the U.S. government.

AIG hasn't decided which investment banks that led its first offering to drop, but will definitely make changes to the line-up of lead underwriters before the next share sale later this year, Chief Executive Robert Benmosche said in a recent interview. He said he had expected the banks to do a better job drumming up investor demand for the insurer's shares in the earlier deal.

The smaller-than-expected $8.7 billion offering in May eked out a small profit for U.S. taxpayers, a result Mr. Benmosche said was "necessary," but it didn't do as well as he hoped.

It is unlikely all four lead underwriters will be replaced; more likely, one or two firms will change, according to people familiar with the matter. Such an outcome would be an embarrassment for whichever bank is dropped from the high-profile assignment and could disadvantage it on future deals. Some bankers have reached out to AIG in an effort to protect their positions, the people familiar with the matter said.

AIG's recent "re-IPO"—so-called because it was the insurer's first share sale in the more than two years since its government bailout and a broad restructuring—was led by Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Representatives for all four banks declined to comment.

Mr. Benmosche's comments represent a rare public rebuke of Wall Street banks by a client, reflecting tensions that have simmered for months between the company and its investment bankers. Over the past two years, AIG has hired banks to manage numerous asset sales and stock offerings to repay its record bailout. Mr. Benmosche is known to drive hard bargains, demanding bankers do a better job for the company and taxpayers and threatening to pull deals if market conditions deteriorate or the banks can't deliver what he wants.

The May stock offering was particularly contentious, as AIG's stock dropped precipitously before the sale, giving the company and the government little room to earn a profit for taxpayers. Once envisioned at topping $20 billion, the offering was scaled down to $8.7 billion, of which $5.8 billion went to the Treasury. The U.S. still holds more than $40 billion in stock, or 77% of the company, which used some of the cash raised in the recent offering to bolster its liquidity.

Mr. Benmosche said most of the banks didn't fully understand AIG when they began talking to investors about the stock. As such, he said, bankers had a hard time explaining the company's complexities and the shares' value to investors, who were skeptical about AIG's growth prospects, risk exposures and estimates of future claims at its property- and casualty-insurance business.

"We got off to a very bad start...and had to play catchup," Mr. Benmosche said, adding he felt some of the banks were unprepared, and "they thought they could sell AIG at a cheap price," below what the Treasury effectively paid for its investment.

In the days leading up to the May sale, the tumble in AIG's publicly traded shares caused some investors to withdraw their bids. Hours before the offering was to be priced May 24, bankers told Mr. Benmosche they might not be able to fetch $29 apiece for the shares. The CEO said he would cancel the deal if they couldn't get that price.

The offering was ultimately priced at $29 a share, a 39% discount to AIG's book value, and slightly above Treasury's effective "break-even" price of $28.73.

In the month following the sale, AIG shares largely traded below $29, and underwriters didn't exercise an option to sell as much as another $1.3 billion worth of the Treasury's shares. On Friday, AIG traded down 27 cents, or 0.9%, at $29.94, in 4 p.m. New York Stock Exchange composite trading.

The next public offering of the government's shares could take place as soon as November, after a 120-day lockup period for the Treasury expires and AIG reports third-quarter earnings. The underwriters will be chosen by AIG and the Treasury.

"We will put together the next field, we will evaluate the banks, and we will choose the best ones at that time to make sure we sell the next batch of shares at a profit," Mr. Benmosche said, adding that AIG has already gotten calls from other banks. "We can only redeem our reputation by repaying taxpayers at a profit."

For any of the lead underwriters, being dropped or demoted would be a reputational setback rather than a financial one. In the first sale, the lead banks, and more than 50 other firms that helped distribute the shares, shared a half-percentage-point fee, of $43.5 million, paid by AIG. The cut-rate fee means selling AIG shares won't be as lucrative as most stock offerings, but the deal's prominence and size makes it a "marquee deal" on Wall Street.

Mr. Benmosche said the May sale achieved its broad objectives and put AIG on a path to exiting from U.S. ownership and repaying taxpayers.

The company now has to demonstrate in the coming months that it can improve its financial performance and disclosures, and produce consistent profits, which will ultimately determine whether investors will buy more than $40 billion more in AIG shares in the next year and a half.

For the next offering, Mr. Benmosche said he wants bankers to show they have "a clear understanding of who AIG is, and our trajectory, and why AIG is a stock that investors should own. If I'm confident they can articulate that well, they will have a chance" at leading the next deal.

The banks that led the recent sale were picked for different reasons, according to people familiar with the matter.

Goldman was selected in part because it played a lead role in last year's initial public offering of pan-Asian life insurer AIA Group Ltd, which helped AIG repay a chunk of its bailout, the people said. Bank of America's Merrill Lynch arm last year advised AIG on an agreement with the U.S. government that accelerated the insurer's exit from U.S. ownership.

J.P. Morgan played a key role in setting up and participating in a new unsecured credit facility for AIG in December, and was a lead underwriter in last year's IPO of federal aid recipient General Motors Co. Deutsche Bank AG, which also played a key role in AIA's IPO, was chosen to help tap investors outside the U.S., particularly in Europe.

AIG and the Treasury are likely to choose one or more new lead underwriters from the other banks that pitched for lead roles in the deal during a January "bake-off" in New York.

That group included Barclays Capital, Citigroup Inc., Credit Suisse Group AG, Morgan Stanley, UBS AG and Wells Fargo & Co.


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