Fed to Wind Up AIG Stake for $7.6B - Analyst Blog

By Zacks.com, December 11, 2012, 05:27:01 PM EDT

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American International Group Inc. ( AIG ) is in the final leg of its government bailout loan repayment as the US Federal Reserve (Fed) announced the sale of the remaining 15.9% ownership in the company. This also indicates a sooner-than-expected complete liberation.

Accordingly, the leftover 234.2 million shares are priced at $32.50 a share, for a total amount being about $7.61 billion. However, the Fed will continue to retain the warrants in order to buy AIG stock in the future. Moreover, it is yet to be known if the shares will be sold in the open market or it will be purchased by the company.

Meanwhile, BofA Merrill Lynch of Bank of America Corp. ( BAC ), Deutsche Bank AG ( DB ), Goldman Sachs Group Inc. ( GS ), JPMorgan Chase & Co. ( JPM ) and Citigroup Inc. ( C ) have been appointed as the joint global managers for the stock offering.

AIG has successfully shrunk the Treasury's ownership in it from 92% in January last year to 15.9% in September 2012, when the Fed raised $20.7 billion from the company's stock sale. The latest share-sale will release AIG of the $182.3 billion rescue loan taken from the US Fed in September 2008, when it was at the peak of financial crisis.

Ever since, AIG raised about $65 billion from asset divestitures, including the recent sale of 90% of International Lease Finance Corporation (ILFC) to a Chinese conglomerate. Alongside, the company raised significant funds through stock offering, rebound of its huge derivative portfolio, business spin-offs and restructuring, in order to repay the government debt and focus on its core insurance operations.

Consequently, AIG has not only been able to repay the large loan amount, but has also generated ample profits for the Fed. Moreover, a complete liberation from the Fed will enhance AIG's capital deployment efficiencies. The company is also expected to initiate dividends by the third quarter of 2013.

The sooner-than-expected wipe-off of Treasury's stake helps to retain the investors' confidence in the company. However, we believe that AIG is liable to be confronted by fresh regulatory challenges from the Fed upon the complete dilution of the Treasury's stake.

Thus, we remain on the periphery at the moment to analyse the managerial and financial implication of AIG's liberation going forward. Consequently, we maintain a long-term Neutral outlook on AIG with Zacks Rank #3, which implies a short-term Hold rating and indicates a slight upward pressure on the stock in the near term.