Posted on 08 Nov 2010
As perception of the American International Group Inc.'s (AIG) creditworthiness rises to the highest level since the government infused it with a $182.3 billion loan in September 2008, the insurer is staging a comeback in the bond market.
AIG is preparing to raise money in a debt sale by year-end as Chief Executive Officer Robert Benmosche seeks independence from the U.S. government, the New York-based company said in a Nov. 5 filing. The cost of protecting AIG’s debt with credit-default swaps has tumbled to 188 basis points from as high as 3,683 in May 2009, according to data provider CMA.
Benmosche, 66, has completed about $37 billion in divestitures of overseas units in the past month as part of a plan to repay U.S. taxpayers. The insurer has made “huge progress” in its restructuring and will emerge from government ownership ranked among the world’s largest insurers, Benmosche told staff last week. AIG bonds returned 2.75 percent in October, the best performance among the top 50 issuers in the Bank of America Merrill Lynch U.S. Corporate Master Index.
“As the story materializes and you can see what the core franchise will look like, that’s getting priced into the bonds,” said Angelo Graci, managing director at Chapdelaine Credit Partners, a New York-based bond broker. “AIG’s debt is trading at levels that require comparison to peers” such as MetLife Inc., the biggest U.S. life insurer, Graci said.
AIG is set to take advantage of demand for corporate bonds as the Federal Reserve’s effort to reduce unemployment and avert deflation by keeping interest rates at record lows and purchasing $600 billion of Treasuries drives investors toward riskier borrowers.
A bond offering would be the parent company’s first since the month before its rescue. AIG must demonstrate access to capital markets before the U.S. withdraws its support, U.S. Treasury Department Chief Restructuring Officer Jim Millstein said in May.
The cost of protecting corporate bonds from default in the U.S. climbed for the first time in six days.
Proceeds from the notes maturing in January 2021 and November 2040 may be used to make early contributions to certain primary domestic pension plans that are otherwise payable during the next five years, said the person, who declined to be identified because terms aren’t set. Benchmark sales are typically at least $500 million.
A debt sale is part of AIG’s plan to exit government ownership and earn investment-grade standalone credit grades from the major ratings companies.
After repaying the Fed with proceeds from asset sales, AIG plans to convert the Treasury’s $49.1 billion stake into common stock for sales on the open market by the end of March.
“If they’re thinking about recapitalization in general, that means they’re moving forward with what kind of firm they want to be in terms of size,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management, who oversees $13 billion of fixed-income assets in Grand Rapids, Michigan. “It says a lot about the market too.”
AIG will focus on global property-casualty coverage and U.S. life insurance after selling its two largest overseas life insurance divisions, AIA Group Ltd. and American Life Insurance Co. AIG divested a 67 percent stake in AIA for $20.5 billion last month in Hong Kong’s largest public offering. MetLife paid $16.2 billion for Alico on Nov. 1.
AIG’s third-quarter profit from continuing insurance operations climbed 6.4 percent to $2.05 billion. The results “reflected continued business stabilization,” said Robert Haines, an analyst at CreditSights Inc. in New York, in a Nov. 5 research note. AIG has been “an amazing turnaround story.”
The company’s shares surged 52 percent this year through Nov. 5. Shares fell $1.10, or 2.4 percent, to $44.51 as of 11:43 a.m. in New York Stock Exchange composite trading.
AIG raised $3.25 billion in its last sale of corporate bonds in August 2008, Bloomberg data show. The insurer sold 8.25 percent, 10-year senior unsecured notes in a private placement that priced at par to yield 432.8 basis points more than similar-maturity Treasuries.
The bond market has also gained confidence in AIG’s International Lease Finance Corp., which this year had its first debt sale through the capital markets since 2008. Los Angeles- based ILFC’s $1 billion of 6.375 percent notes due March 2013 have soared to 104.25 cents on the dollar to yield 4.47 percent, Trace data show. The securities traded as low as 53 cents in March 2009.
The plane-leasing unit said in August that it increased liquidity by more than $12.5 billion this year by extending credit agreements, selling aircraft and issuing bonds.
The cost to protect AIG debt with credit-default swaps is at about the lowest since June 2008, declining from as high as 604 basis points on May 25.
Prices on AIG default swaps imply the debt is ranked Ba1 as of Nov. 4, up from Ba3 in September and four levels below its actual A3 rating, according to Moody’s Corp.’s capital markets research group.
“If the trend line continues in the same direction, that would suggest it won’t be that long before they achieve investment-grade status,” said Allerton Smith, senior director of Moody’s capital markets research, a unit of Moody’s Analytics. “The market is continuing to gain a greater degree of comfort with the company’s operations.”