AIG Falls on Concern Shareholders Will Be Wiped Out (Update2)
Hugh Son and Erik Holm
Sept. 17 (Bloomberg) -- American International Group Inc. fell 44 percent on speculation the government's takeover will ultimately wipe out shareholders.
The U.S. plan to save AIG, the nation's largest insurer by assets, may give the government an 80 percent stake in return for an $85 billion loan, and dividends may be halted to common and preferred stockholders. The U.S. reversed its opposition to a loan after private efforts collapsed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility.''
The ``punitive'' interest rate on the two-year loan ``makes it extremely clear that this is not a subsidy extended to keep the company afloat but rather a stranglehold that makes AIG unviable while ensuring that its obligations will be met,'' said Marco Annunziata, an analyst at UniCredit SpA, in a note to clients. ``This is to all extents and purposes a controlled bankruptcy.''
AIG unraveled as the worst housing crisis since the Great Depression led to more than $18 billion of losses in the past year. A meltdown could have cost the financial industry $180 billion, according to RBC Capital Markets, because AIG provided insurance on more than $441 billion of fixed-income investments held by the world's biggest institutions, including $57.8 billion in securities tied to subprime mortgages.
`Systemic Risk'
``It's an enormous relief,'' said David Havens, credit analyst for UBS AG in Stamford, Connecticut. ``Nobody really knows what it would have meant if they would have been allowed to fail, but there was an enormous amount of systemic risk. The problem was, nobody really knew how bad it could have been.''
The agreement will give the company, which sells insurance in more than 130 countries, time to sell assets ``on an orderly basis,'' AIG said in a statement. The credit line, secured by AIG's assets, is 8.5 percentage points above the three-month London interbank offered rate, or a current rate of about 11.5 percent.
Chief Executive Officer Robert Willumstad, 63, will be replaced by former Allstate Corp. CEO Edward Liddy, 62.
AIG declined $1.70 to $2.05 at 4:15 p.m. in New York Stock Exchange composite trading. The insurer has plunged 96 percent this year.
AIG's $2.5 billion of 5.85 percent notes due in 2018 fell 1.75 cents to 43 cents on the dollar in New York after earlier rising 14.25 cents, according to Trace, the bond-price reporting system of he Financial Industry Regulatory Authority.
The debt yields 19.2 percent, or 15.8 percentage points more than similar-maturity Treasuries, Trace data show.
Credit Downgrades
The survival of the 89-year-old insurer fell into doubt when Standard & Poor's and Moody's Investors Service cut its credit ratings on Sept. 15. The reductions threatened to force AIG to post more than $13 billion in collateral when the company was already short on cash. AIG couldn't raise money by selling shares after the stock plunged to less than $4 a share from $70.11 in October of last year.
The $85 billion loan will give AIG time to sell units, New York Insurance Superintendent Eric Dinallo said in a Bloomberg Television interview. ``There is absolutely no solvency issue'' with AIG, he said.
The loan ``greatly exceeds any near-term needs for liquidity,'' S&P said in a statement today.
The Fed's loan doesn't require asset sales or the company's liquidation, though these are the most likely ways AIG will repay the Fed, central bank staff officials told reporters on condition of anonymity. Blackstone Group LP advised AIG on the transaction.
Markets Unprepared
The Fed doesn't have an expectation of whether AIG will be smaller, nonexistent or similar to its current form at the end of the loan's term, the staffers said.
The Fed or Treasury will end up holding the AIG stake, the staffers said. The Fed bailed out AIG while refusing aid to Lehman Brothers Holdings Inc., which collapsed earlier this week, because financial markets were more prepared for a Lehman failure, a Fed staff official said.
The Fed stepped in after JPMorgan Chase & Co. and Goldman Sachs Group Inc., which were brought in to help assess AIG, failed to come up with a solution, according to a person familiar with the talks. Liddy is currently on the board of Goldman, the company Henry Paulson ran as CEO before becoming the U.S. Treasury secretary in 2006.
Hank Greenberg
Willumstad, the former Citigroup Inc. president who left the bank in 2005 to seek a CEO position, was named to AIG's top post in June. His predecessor, Martin Sullivan, was chief for three years until being ousted after two record quarterly net losses. Maurice ``Hank'' Greenberg reigned at AIG for almost four decades until he was forced to retire in 2005 amid regulatory probes.
Greenberg, who remains one of the company's biggest stakeholders, said the company needed a bridge loan instead of a plan that put the company under government control. An investor group led by Greenberg said in a federal filing hours before the rescue was announced it might want to buy the company or some units or make loans to AIG.
``Why would you want to wipe out shareholders when you just need a bridge loan?'' Greenberg, 83, said in an interview before the announcement. ``It doesn't make any sense.'' Greenberg declined to comment after the Fed announcement, spokesman Glen Rochkind said.
Unit Sales
Businesses that may be sold by AIG include American General Finance Corp., the division that makes home and auto loans, said Citigroup analyst Joshua Shanker. The unit generated $2.89 billion in revenue last year, about 2.6 percent of AIG's total. Other candidates include AIG's U.S. variable-annuity business, and a 59 percent stake in reinsurer Transatlantic Holdings Inc., he said.
Asset manager AIG Investments, with 5.1 percent of AIG's revenue, could also be sold, said Gary Ransom of Fox-Pitt Kelton Cochran Caronia Waller.
American General Finance's price could be more than $6 billion if the unit sold for twice its book value. AIG Investments could fetch more than $3 billion if it sold for 2.5 percent of clients' assets under management. The Transatlantic stake is worth about $2.3 billion, based on yesterday's share price. The variable annuity results aren't broken out, making an estimate difficult, said Shanker. AIG acquired the business a decade ago when it bought SunAmerica for $19.7 billion in stock.
Aircraft Leasing
AIG's aircraft-leasing unit International Lease Finance Corp. may be bought by investors led by the unit's founder, Steven Udvar-Hazy, the Wall Street Journal reported, citing unnamed people. Udvar-Hazy has been in discussions with potential investors since Sept. 14, the Journal said.
AIG may find buyers for life insurance businesses outside the U.S. where competitors including Hartford Financial Services Group Inc., MetLife Inc., Prudential Financial Inc., and Canada's Manulife Financial Corp. have been adding customers.
``In developing insurance markets around the world, the growth rates are, on average, twice what the growth rates in the U.S. are,'' MetLife Chief Financial Officer William Wheeler said Sept. 10. ``When properties come up for sale around the world, it's very competitive.''
Auto insurers are also consolidating, making AIG's car unit a takeover candidate. Liberty Mutual Group Inc. agreed in April to buy Safeco Corp. for $6.2 billion, the U.S. industry's biggest transaction since 2004.
A Different Look
``AIG has yet to communicate broadly to shareholders on the company's intentions,'' Wachovia Corp. analyst John Hall said in a note to investors. ``Whatever plan the company may have AIG will look decidedly different in two years.''
AIG rejected a bid for a joint investment by Allianz SE and J.C. Flowers & Co. on Sept. 14, said two people with knowledge of the offer.
Allianz, Europe's biggest insurer, and Flowers, the New York-based private equity firm run by J. Christopher Flowers, proposed the cash infusion to help AIG fend off a liquidity crunch, the people said.
Sabia Schwarzer, an Allianz spokeswoman, declined to comment. Flowers and Nicholas Ashooh, an AIG spokesman, didn't return calls seeking comment.
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net.
Last Updated: September 17, 2008 16:53 EDT