AIG's Deal Gives New York Fed Skin In The IPO Game
May 20 2009 - 1:44PM
Dow Jones News
Whether the New York Fed makes or loses money on its holdings in
American International Group Inc.'s (AIG) businesses-some of which
are being spun off or sold as IPOs-could hinge on a strong market
recovery.
AIG announced in March that it would create special purpose
vehicles, or SPVs, to transfer ownership interests in its
international life insurance businesses to the New York Federal
Reserve in return for forgiveness of much of its debt.
The deal was struck as an alternative to accepting lowball
offers from would-be buyers, in a market that made it "much more
difficult for companies to raise debt to finance acquisitions,"
Edward Liddy, AIG's chairman, said in March. Auctions to sell
minority stakes in its foreign life insurance operations reportedly
failed to generate acceptable bids.
One SPV holds American Life Insurance Co. (ALICO.KA), AIG's
international life insurance business. A second SPV consists of
American International Assurance Company, Ltd., its life insurer
that covers China and other parts of Asia except for Japan. AIG
said Monday that it plans an initial public offering of AIA in an
Asian stock market in 2010.
The New York Fed will get a minority ownership in the form of
preferred equity shares of both SPVs in return for erasing up to
$26 billion of AIG debt.
"If we see a normalization and if AIG is able to stabilize, both
big ifs, the Fed will recoup their money" in a sale or IPO, said
Rob Haines, an analyst with CreditSights Inc., in an interview.
"The further you get away from the U.S., the better these business
units are doing, but all of them are under pressure."
AIG's biggest asset sale so far, of its U.S. auto insurance
business in April, brought in about $1.9 billion, equivalent to the
unit's book value, and far less than it had paid for a portion of
the business a few years before.
Haines estimated that ALICO and AIA together might be worth
around $40 billion today, a 70% discount from their estimated
combined market value of $130 billion at the peak of the market. At
the estimated value, a 49% stake, for instance, would be worth
around $19.6 billion.
Representatives of AIG and the Fed said negotiations over the
SPVs were in progress. Neither would say how big a stake the Fed
will get and exactly how much debt will be wiped away. The value of
the Fed's interest in AIA and ALICO will be "based on valuations
acceptable to the" Federal Reserve Bank of New York, AIG's
announcement said.
AIG owed the New York Fed about $42.6 billion at the end of
April. A concurrent agreement gives the New York Fed securitization
notes worth up to $8.5 billion backed by AIG's U.S. life insurance
businesses.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141;
lavonne.kuykendall@dowjones.com