Bond return

AIG bonds: American International Group is eager to put its $180 billion-plus bailout behind it. Its $2 billion bond deal on Tuesday is another step in a series taken by its hard-charging chief executive Robert Benmosche to get the US insurer back to its private sector roots.

The fundraising is the first of its kind for the company since its last ditch sale in August 2008. Then it raised $3.25 billion, after discovering that a $20 billion capital raising undertaken only months earlier was far too small to fill the increasingly visible hole in its balance sheet. AIG is not so desperate now - the new debt will cost less relative to Treasury yields than back then, and far less once today's lower government bond yields are taken into account.

 

But the company is still paying up for a ticket back to normality. Its new three and 10-year debt is set to yield 3 to 3.6 percentage points more annually than comparable Treasuries, or some 0.3 to 0.4 percentage points more than its most similar outstanding bonds. Investors know that's a deal they may not get again if Benmosche's plans pan out. Strong demand for the bonds helped reduce the expected yield once the selling process was launched.

AIG’s $114 billion of outstanding debt as of September 30 is a sizable chunk, but the company's leverage looks manageable given its total equity adds up to only a slightly lower figure, meaning bondholders have a fairly plump cushion against default. Moreover, when the company completes the planned rejig of the government's various interests, the Treasury's shareholding will swell to 92 per cent. It's likely the government will do what it can to keep AIG on the road to full health.

In fact, for investors the yields look huge compared with the debt of the government's other troublesome charges, Fannie Mae and Freddie Mac.

Fannie earlier this month sold two-year debt that yielded little more than 0.1 percentage point over comparable Treasuries. But then again, unlike in AIG’s case, the government has said precious little about turning the housing finance giants over to private sector.

It may take some time for the Treasury to offload its big shareholding, but AIG’s new bonds, following the big sale of Alico and the flotation of AIA, demonstrate Benmosche’s determination for the company to stand on its own two feet. Investors look ready to give it a hand.