AIG Sells $250M Notes - Analyst Blog

By Zacks | August 21, 2012 AAA

Yesterday, American International Group Inc. (AIG) announced the sale of unsecured senior notes worth $250 million. The proceeds of these notes are expected to be utilized for enhancing the operational performance of the company. Accordingly, the $250 million three-year fixed-rate notes are issued at a price of $99.908, bearing a coupon rate of 2.375% and yield of 2.407%. The notes are dated to mature on August 25, 2015. The notes are callable and projected to have a spread of 200 basis points (bps) over the US Treasuries. Interest on the notes will be paid semi-annually, in equal installments.

Meanwhile, AIG appointed Morgan Stanley (MS), JP Morgan Chase & Co. (JPM) and Citigroup Inc. C) as the joint book-running managers for the sale. The above-mentioned set of fixed-rate notes carry a rating of "Baa2" and "BBB+" from Moody's Investor Service of Moody's Corp. (MCO) and Standards & Poor's (S&P), respectively.

Earlier this month, Moody's had affirmed the senior unsecured debt of AIG at "Baa1" rating, while the insurance financial strength (IFS) of AIG's businesses - Chartis and SunAmerica were confirmed at "A1" and "A2", respectively. The assertion came after the company posted healthy second-quarter 2012 financial results, which was followed by buying back shares worth $2.0 billion from the US Treasury, thereby reducing the latter's stake to 53% from the prior 61%. The consistent repayment of the government's bailout loan also appears to leave ample scope for raising debt for business operations.

AIG is enjoying a sustainable financial leverage and pre-tax interest coverage along with a strong operating cash flow. The company also has excess liquidity in its Direct Investment book (DIB), a runoff portfolio, which includes the interest of Maiden Lane III. Hence, the company need not use its cash and other fund sources apportioned for operations currently.

Conversely, these fund sources enhance the company's capital flexibility. Going foreward, the simultaneous improvement in the company's credit curve and earnings potential from Chartis and SunAmerica should provide the required buoyancy for long-term growth.

Additionally, AIG is likely to reduce its financial leverage and augment its pre-tax interest coverage through consistent debt reduction and improvement in core operations in the next 12-18 months.

Overall, we believe amidst the macro-economic factors and interest rate volatility, AIG has the potential to liberate itself from the clutches of the government, while also being able to maintain a strong and competitive business profile in the future. Currently, AIG carries a Zacks Rank #2, which implies a short-term Buy rating although the long-term recommendation remains Neutral.

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