The latest $20.7 billion sale of
American International Group Inc.
) stock by the US Treasury has inclined the ratings agencies to
subtract the government support from the company's credibility
Yesterday, the Treasury further reduced its stake in AIG to
15.9% from the prior 53.4%, by selling 553.8million shares in the
open market, at $32.50, a share for $18.0 billion, of which 153.8
million shares were bought back by the company for $5.0 billion.
The Treasury also raised an additional $2.7 billion by selling 83.1
million extra shares to the underwriters.
The share price of $32.50 also came in quite above the
Treasury's break-even of $28.73 per AIG share. Meanwhile, the
Treasury expects to earn about $15.1 billion from the $182.3
billion government bailout loan, which it had granted to AIG in
2008. However, following the latest sale, the Treasury holds about
234.2 million shares of AIG, which constitutes the remaining 15.9%
As AIG's consistent deleveraging and restructuring efforts,
taken over the past few years, have started showing positive
results. Yesterday Fitch Ratings upgraded its issuer default rating
(IDR) of AIG to "BBB+" from "BBB". Even its subordinated debt and
junior subordinated debentures were upgraded to "BBB-" and "BB+"
from "BB+" and "BB", respectively. However, the rating agency
affirmed the company's senior unsecured debt at "BBB". The outlook
for all remains stable.
Concurrently, Standard & Poor's Ratings Services (S&P)
affirmed its long-term counterparty credit rating of "A-" on AIG.
Additionally, its senior unsecured debt, subordinated debt and
junior subordinated debentures were affirmed at "A-", "BBB+" and
"BBB", respectively. However, S&P has raised some caution
by demoting its outlook to negative from stable.
Nevertheless, Moody's Investor Service of
) asserted the company's financial strength and senior debt ratings
by affirming the senior unsecured debt of AIG at "Baa1" along with
a stable outlook.
Basis of Ratings
The ratings agencies have not only confirmed the substantial
improvement in AIG's capital and operating leverage, but also
expect it to be strongly competitive going forward. This optimism
is based on the company's consistent deleveraging efforts and
business restructuring, by shedding off redundant assets, to repay
the government debt and focus on its core insurance operations.
Additionally, the sooner-than-expected wipe-off of Treasury's
stake also injects confidence among the ratings agencies and
investors, thereby expecting AIG to liberate itself entirely before
the end of 2012.
While S&P's revised outlook casts concern over AIG's weak
fixed-charge, it also projects this metric to advance more than
4.0x in 2012 from 3.0x in 2011. The rating agency believes that the
company's earnings strength is still inferior to its debt
obligations and that a similar trend in the next couple of years
may warrant a ratings downgrade.
Conversely, Fitch remains confident of the company's debt
leverage that strikingly reduced to about 21% now from 77% at the
end of 2010. Even AIG's total financial commitment (TFC) ratio
improved to 1.3x currently from 2.5x at 2010-end, and is further
expected to be in line with peer group at below 0.7x in the near
AIG has shown stark improvement in its financial results so far
in 2012, given lower catastrophe losses, reducing interest expenses
and superior performance from its primary businesses - Chartis and
SunAmerica. The ratings agencies also appear quite optimistic
about the company's core earnings and underwriting profitability
for the rest of 2012.
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. The overall enhanced
outlook is also highlighted by management's anticipation of
initiating dividends in 2013, thereby boosting investors'
We believe that amidst the macro-economic factors and interest
rate volatility, AIG has the potential to liberate itself from the
clutches of the government, and 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.
AMER INTL GRP (AIG): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
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