The offering of unsecured AIG notes is the first since the company lost access to the credit markets in the fourth quarter of 2008 received government funding through the TARP program.
As the company has completed major asset sales and made progress in its restructuring in recent months, market prices of its outstanding bonds have staged a strong recovery, enabling the company to tap the markets again.
AIG is now looking to issue three-year and 10-year notes in a benchmark-sized offering, meaning that at least $500 million is likely to be offered. People familiar with the sale said the insurer was unlikely to sell more than $2 billion.
The new bonds are expected to receive investment-grade credit ratings: A3 by Moody's Investors Service, A-minus by Standard & Poor's, and BBB by Fitch Ratings.
The company said in an offering prospectus that it intends to use proceeds from the debt sale for general corporate purposes, as agreed with the New York Fed, which is currently its largest creditor. Bank of America Merrill Lynch, Barclays Capital, Citigroup and Morgan Stanley are arranging the debt offering.
AIG is broadly trying to bring down its total debt, or leverage, to levels more in line with companies with high investment-grade ratings. The insurer is currently working to close an agreement with the government that will effectively end active federal support of the insurer and position the Treasury to start selling off a 92% ownership stake in AIG starting in 2011 through stock sales over the next two years.
Before that can occur, AIG needs to demonstrate it has access to other sources of financing besides the government, which still has over $90 billion in outstanding assistance to the company in the form of a secured credit facility and investments in preferred equity of AIG and its units. The latest bond sales are being done to show that AIG can tap the markets when it needs to.
AIG recently raised $37 billion from asset sales and is hoping to fully repay and terminate its credit facility from the New York Fed by year end. Besides issuing new bonds, AIG is also negotiating new credit lines from commercial banks that will replace its funding from the Fed.
Since its September 2008 bailout, prices of AIG's existing bonds have rebounded from crisis lows of around 30 to 40 cents on the dollar to trade at close to their full value of 100 cents, as their yields have fallen. The improvement occurred as AIG met its financial obligations, reduced risk exposures, and stabilized the operations of its core insurance businesses, which comprise a global property and casualty insurance business and a domestic life insurance and retirement services unit.
The last time AIG issued bonds was in August 2008, when sold $3.25 billion of 8.250% senior notes due August 2018, according to Dealogic data. On
Tuesday those bonds were yielding 5.851%, or 3.07 percentage points over yields on comparable Treasury notes, according to bond-trading platform MarketAxess.
The cost of insuring AIG's debt from default has also fallen sharply, to levels last seen before the bailout. Derivative prices now imply that AIG's risk of default is comparable to that of other large companies in the life insurance sector. But AIG is still viewed as riskier than most property and casualty insurers.
With the annual yield on AIG's new bonds likely to exceed yields on bonds of other insurers, company officials are hoping that investors see its debt as an investment that could offer potential upside if AIG makes further progress in its restructuring and de-risking efforts. Investors typically demand a higher yield and rate of return on bonds of riskier companies, and as risk is reduced bond yields could fall, pushing up their prices.