AUGUST 19, 2010.

AIG Sets Stage for First Bond Sale Since Bailout

By SERENA NG

American International Group Inc. is laying the groundwork for its first debt offering in two years, in what could be a key measure of whether investors think the bailed-out insurance giant can stand on its own and ultimately repay taxpayer funds.

Bloomberg News

Robert Benmosche, president and CEO of AIG.
.Earlier this month, AIG expanded an existing registration statement for securities offerings to include debt, an indication the company could try to sell bonds or other securities quickly and from time to time when market conditions are favorable.

AIG didn't say when it will try to raise money, but analysts and people familiar with the matter say the government-controlled insurance giant could issue new debt before year-end. An Aug. 9 prospectus filed by AIG said net proceeds from securities sales would likely go toward repaying some of its debt to the Federal Reserve Bank of New York, which the company recently owed $23.7 billion.

AIG declined to comment.

For AIG, which hasn't raised money from outside investors since its bailout in September 2008, a debt offering would be a milestone that serves several purposes. While the company is unlikely to try to refinance the bulk of its government debt, a small bond sale could signal that AIG has access to other sources of funding besides the government, which now owns nearly 80% of the company.

The 'Poisonous Effect'. Access thousands of business sources not available on the free web. Learn More.Other firms that previously received bailout money had to demonstrate they could raise capital on their own before repaying the U.S. government.

A successful sale of long-term debt also could indicate that investors see a future for the company and expect it to repay the New York Fed, whose credit facility to AIG expires in September 2013.

There remain significant doubts that AIG, which has received roughly $130 billion in U.S. taxpayer support in total, can repay its rescue funds in full, and a debt offering would be a test of investors' willingness to lend money to the company.

To exit from government ownership, AIG will eventually have to sell a large amount of common stock, which is a much riskier investment than debt. A stock offering, however, isn't likely to happen until AIG is mostly out of the woods. If AIG can't raise money on its own, it will continue to be heavily reliant on government support.

In recent months, some AIG subsidiaries were able to raise money from the credit markets. Last week, for example, its aircraft-leasing unit, International Lease Finance Corp., moved to sell roughly $4 billion in loans and bonds to help repay some of AIG's debt to the New York Fed.

AIG's progress in its restructuring and a broader rally in the credit markets have helped boost market prices of the company's existing bonds in recent months. For example, an AIG bond that comes due in October 2015 recently traded around 99 cents on the dollar, yielding 5.3%, or about four percentage points more than the yield on a comparable Treasury note.

At the start of this year, that AIG bond was trading at 85.5 cents and yielding more than 8%, according to MarketAxess, a bond-trading platform. Bond prices and yields move in opposite directions, and investors usually demand lower rates of returns if they see less risk of a default. In late 2008, during the depths of the financial crisis, AIG's bonds yielded over 20%, making borrowing from the private sector virtually impossible.

"Right now, investors don't perceive AIG to be dramatically riskier than other insurance companies," said Rob Haines, an analyst at debt-research firm CreditSights Inc. A small bond offering could enable the company "to gauge investor demand and see how receptive they are."

AIG currently has the equivalent of a single-A-minus credit rating from Moody's Investors Service and Standard & Poor's, but that investment-grade rating is largely due to the financial support the U.S. government has provided.

Absent government support, AIG would have a noninvestment-grade, or "junk," credit rating. AIG chief executive Robert Benmosche has said the company is trying to get its "stand-alone" rating back to single-A, which would entail sharply lowering its debt, maintaining or improving the profitability of its insurance businesses, reducing risk and disposing of noncore units. Last week, AIG reached a deal to sell 80% of its debt-heavy and loss-making consumer-finance business, removing a key drag on its finances.

Over the past year, various banks and insurers that received funds from the Treasury's Troubled Asset Relief Program repaid what they owed the government after raising money from investors from stock and debt sales. "A necessary step for other institutions was accessing the capital markets on their own before they went to the government with a plan to repay TARP," said Robert Riegel, managing director of Moody's U.S. Insurance team. He notes, however, that AIG's situation is more complicated because of the size and scale of its bailout.

Much of what AIG owes the New York Fed is expected to be repaid with cash from asset sales, though a portion could come from new debt issues. The annual interest rate on AIG's loan from the New York Fed is currently about 3.35%.

The regional Fed bank is looking to recoup a separate $55 billion in equity holdings from sales of AIG's overseas life insurance businesses and from mortgage securities previously linked to the insurer. The Treasury Department separately has a $49 billion investment in AIG preferred shares, some of which are widely expected to be converted in the future into AIG common stock and sold to investors.

Write to Serena Ng at serena.ng@wsj.com

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