AIG Subordinated Debentures (AVF)

[Joe Stocks]

AVF/AFF - AIG bond prices may overstate risk - CreditSights
Fri Oct 3, 2008 5:18pm EDT
NEW YORK, Oct 3 (Reuters) - The distressed level at which American International Group's (AIG.N: Quote, Profile, Research, Stock Buzz) debt is trading may be reflecting too much risk as the company's planned asset sales should raise ample funds to protect bondholders, CreditSights said Friday.

Bonds trading between 50 and 60 cents on the dollar have a "significant amount of value given our projection of nearly 1.0 times asset coverage even in our most draconian scenario," analyst Rob Haines said in a note.

For example, AIG's 5.375 percent bond due 2011 traded at 59 cents on the dollar on Friday. It had traded at 95 cents in early September, according to MarketAxess.

CreditSights carried out a sum-of-the-parts valuation of AIG, based on market comparables and metrics from recent transactions. The valuation was done after AIG said it is planning to refocus on core property and casualty insurance and put all its other businesses up for sale.

AIG was bailed out by the government last month after a severe liquidity crisis. The company was given access to an $85 billion loan facility to enable it to meet short-term financing needs while it prepares asset sales.

Newly appointed Chief Executive Ed Liddy said the company is not in a fire sale position and will take the time needed to maximize value for its units. For more, see [ID: nN03321593]

CreditSights estimates that the company's general insurance business is worth $95.2 billion, its life insurance and retirement services business is worth $147.7 billion, its financial services business, including its aircraft leasing unit, is worth $9 billion and its asset management operations are worth $3.6 billion, said Haines.

That valuation, which assumes limited stress in the financing markets, comes to a total of $255.5 billion. The research firm also prepared a scenario that adjusts estimates to allow for current difficult market conditions.

Following the disclosure that AIG has drawn down $61 billion of its loan facility, CreditSights updated its estimate of the company's pro forma debt structure.

While it is difficult to break out the full amount of debt associated with the company's insurance units, the debt related to other businesses is disclosed in various filings, said the analyst. If AIG succeeds in selling those businesses, it will be able to offload the associated debt that had been consolidated on its balance sheet.

That debt totals $111.2 billion, or including the borrowings from the government facility, $172.2 billion.

"The main takeaway of our updated analysis is that our estimated value for AIG's businesses still provides ample asset coverage for AIG debt after valuing each segment on a standalone basis as well as after haircutting our valuations by as much as 40 percent," Haines said.

AIG may be forced to accept discounts from full market value on its sales given the weak financing and operating environment, he said.

"Factoring in the value of the collateral posted on various derivative transactions by assuming that some of it flows back to AIG after the derivatives roll off or the company gets upgraded, asset coverage could be even more robust," he said.

The chance of a near-term upgrade from Standard & Poor's fell Friday after the agency said it has revised the outlook on AIG ratings to "negative" from "developing."

S&P analyst Rodney Clark said there is risk that the company will not succeed in offloading assets. At the same time, the smaller and less-diversified company expected to emerge after unit sales is facing higher debt-servicing costs on the government loan.

The agency has an "A-minus" rating on AIG (AIG.N: Quote, Profile, Research, Stock Buzz), four notches above speculative, or "junk" status.

The cost of insuring AIG debt against possible default fell slightly Friday, although credit default swaps continued to trade at distressed levels.

CDS were trading at 27.5 percent upfront, or $2.75 million annually to insure $10 million for five years, plus annual payments of $500,000, according to Markit Intraday.

CDS trade upfront when default fears rise and sellers of protection want to be paid more at the outset of the contract. (Reporting by Ciara Linnane; Editing by Dan Grebler)

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0336239320081003