AIG: Paying Off a $60 Billion Loan, One $742 Million Deal at a Time
AIG has to pay back a $60 billion loan to the U.S. government in the next five years. If it keeps selling businesses at these valuations, AIG may end up a few dollars short of the bill.
AIG knows that paying back the loan will be tough, particularly with a giant neon “fire sale” sign hanging over the entire enterprise. Monday’s sale of AIG’s Hartford Steam Boiler specialty insurance unit for just $742 million shows how tough.
AIG paid $1.2 billion for Hartford in 2000. That was about three times Hartford’s book value and 21 times HSB’s estimated 2000 earnings, according to analysts at the time. And it was considered a rich price–particularly as Hartford announced a quarter loss of $18 million just after AIG announced the deal in the third quarter of 2000, compared with the year-earlier third-quarter profit of $18.8 million.
AIG is selling Hartford for 1.2 times to 1.5 times book value, according to this Wall Street Journal article Monday, or roughly 4.6 times earnings. (AIG pulled out about $740 million in dividends from HSB over the years, which improves AIG’s overall return on the business.)
At that rate, AIG’s backlog of sales won’t approach what the insurer owes the government. AIG closed out 2007 with a tangible book value of $34.15 a share. In the most recent quarter, AIG’s tangible book value was a little more than $22 a share. If all of AIG were to sell at 1.1 times tangible book value, the entire company would garner just $59.1 billion.
Still, AIG investors, starving for good news, sent the insurer’s shares up 5% Monday, despite Standard & Poor’s opinion that “AIG is indebted to the Fed for over $150B; we remain skeptical that AIG will generate enough asset sales to fully repay this obligation.” (S&P’s estimate of $150 billion on AIG’s total government debt is a bit severe; the insurer’s government help breaks down into a $60 billion loan, a $40 billion investment that requires annual dividends, and two special purpose vehicles that are collateralized and therefore don’t require further payments from AIG.)
Three months after the government stepped in, AIG has sold one big unit–its Swiss private bank–to an Abu Dhabi investment group for $336 million, including $83 million in loans the group is taking on. AIG has sold other, small businesses–namely, its stake in two joint ventures—and it has another unit, American Life Insurance, on the block.
And last week it sold $39.3 billion of residential mortgage-backed securities for just $19 billion to Maiden Lane II, , an investment vehicle funded up to $22.5 billion by the New York Fed and co-funded with $1 billion AIG to guarantee troubled assets. The move came close to nearly curing AIG of its $40.8 billion exposure to troubled residential mortgage-backed securities. It also effectively shut down AIG’s securities-lending business and freed up capital for the life insurance business. “This was another important step in attempting on AIG’s path to recovery and should help make it easier to negotiate a sale of some of the life insurance businesses,” wrote analysts from Fox-Pitt Kelton last week. “It also relieves some liquidity pressure on the company.”
AIG has several great hopes for raising the billions of dollars it needs. One is its aircraft-leasing business, International Lease Finance, which could fetch as much as $10 billion if the company’s estimates hold true.
Still, based on the valuations of sales announced thus far, AIG’s deal machine seems to be using optimism as its primary fuel. “These are unique assets that should generate enough capital to repay the debt and buy back the preferred shares,” Chief Executive Edward M. Liddy said in an interview with the Wall Street Journal this month.
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