Thread: U.S. Treasury launches $18 billion AIG stock offering

UPDATE 3-U.S. Treasury launches $18 billion AIG stock offering

By Soyoung Kim and David Henry

NEW YORK, Sept 9 (Reuters) - The U.S. Treasury Department said it will sell most of its stake in insurer American International Group Inc, making the government a minority investor for the first time since it rescued the company four years ago.

While the Treasury was universally expected to sell stock this month, the magnitude of the planned $18 billion offering was a surprise that will take the government stake in what had been the world's largest insurer to around 20 percent from 53 percent currently.

The sale announced on Sunday will trigger a number of changes for AIG, the most important of which is that it will now fall under Federal Reserve regulation as a savings and loan holding company, since the company owns a small bank. The Treasury will also lose the ability to dictate the terms of further stock sales.

AIG said it would buy up to $5 billion of the offering. Last week the company sold part of its stake in the Asian insurer AIA to help fund that buyback.

A number of analysts who follow AIG said at the time they were disappointed the company was not buying back more shares, although they also assumed the eventual government offering would be much smaller than it has turned out to be.

Barclays Capital, in a research note Friday, said investors were likely to be disappointed if the government was not out of the stock by the November election.

POLITICS AT PLAY?
The sale, Treasury's biggest sell-down of its AIG stake so far, comes as President Barack Obama campaigns for a second term and has been forced to defend his support of decisions to use taxpayer money to prop up companies during the financial crisis.

Likewise, The government has redeemed all of its holdings of Citigroup Inc except for $3 billion of preferred securities on which it receives an 8 percent dividend.

But the Treasury has steadfastly denied it was rushing to exit the AIG stake before the election, even as the repeated profitable sales of the insurer's stock burnished the reputation of the crisis-era rescues.

MORE TO COME
With the Treasury's break-even point at $28.72 and AIG shares closing Friday at $33.99, this sale is likely to be profitable as were the government's four prior offerings of the company's stock.

If the Treasury were to sell $18 billion at AIG's Friday closing price, it would be selling roughly 529 million shares.

Treasury said it will also grant to the underwriters a 30-day option to purchase up to an additional $2.7 billion of common stock to cover any over-allotments.

The announcement on Sunday comes just a month after the Treasury sold 188.5 million AIG shares for $5.75 billion in a public offering. That sale was priced at $30.50 per share.

AIG executives, among them CEO Bob Benmosche, have said of late they expect the government to be out of the insurer by 2013.

Benmosche, who has been fighting cancer while running the company over the last couple of years, is widely credited with saving AIG from a fire sale of assets and redirecting it toward the form it has taken today.

The company's three pillars are the global property insurer Chartis, the U.S. life insurance and annuity company SunAmerica and the market-leading mortgage insurer United Guaranty.

Still to be determined is the fate of airplane leasing business ILFC. AIG filed to take it public last year, but the planned offering has languished amid weak markets.

UPDATE 3-U.S. Treasury launches $18 billion AIG stock offering | Reuters

AIG shares price at $32.50, cutting U.S. stake to 19 percent


The logo of American International Group Inc. (AIG) on the outside of their corporate headquarters in New York, November 10, 2008.
Credit: Reuters/Mike Segar

By Lauren Tara LaCapra and Olivia Oran
Mon Sep 10, 2012 8:15pm EDT

(Reuters) - The Treasury Department's $18 billion offering of American International Group shares priced at $32.50, an underwriter said, lowering the government's stake in the bailed-out insurer to 19 percent.

The underwriters also have the option to buy another $2.7 billion worth of AIG shares, which they can exercise in the coming days. If they do, it would make the Treasury Department's sale the largest secondary offering in the history of the U.S. stock market.

The offering represents the government's biggest sell-down of AIG since it rescued the insurer with bailouts in 2008 and 2009. It was also the largest follow-on stock offering since December 2009, and the largest equity offering since Facebook Inc's initial public offering in May, according to Thomson Reuters data.

The offering was priced at a 4 percent discount to AIG's closing price of $33.99 on Friday, the last trading day before the Treasury Department announced plans for the sale.

AIG's stock closed 2 percent lower at $33.30 on the New York Stock Exchange on Monday.

Investors had widely expected the Treasury to cash out of its AIG shares, but many investors had expected the sales to happen over a longer period of time.

Companies have been hesitant to sell stock recently due to market volatility and a lack of investor appetite. Through September 7, year-to-date equity capital markets proceeds were down 27 percent from the same period in 2011, according to Thomson Reuters data, with IPOs down 47 percent and follow-on offerings down 16 percent.

"Everyone wants the government to eventually get out of the stock because it's been a hang-up for the company," said Eric Steiman, an individual investor who owns AIG shares and publishes his investment approach on the website Covestor. "It's just a matter of: can the market handle a huge offering?"

The Treasury Department's $18 billion stock sale is the biggest follow-on offering since Bank of America Corp sold $19.3 billion worth of stock in 2009, according to Thomson Reuters data.

The stock sale reduced the government's stake in AIG to 19 percent from a previous level of 53 percent. Selling another $2.7 billion worth of stock at $32.50 per share would further reduce the government's stake to 14 percent.

The Treasury also owns warrants to purchase another 2.7 million shares, according to AIG's filing. The Treasury has allowed other financial firms to repurchase bailout-related warrants directly or to auction them off.

REGULATORY CHANGE
The decrease triggers an important regulatory change for AIG. Once the Treasury's ownership stake falls below 50 percent, the insurer starts to be regulated by the Federal Reserve as a savings and loan holding company, since AIG owns a small bank.

As a result, AIG will have to comply with new rules under the 2010 Dodd-Frank financial reform law, including the Volcker rule, which limits large financial firms' ability to trade for their own account or own stakes in private equity firms and hedge funds.

Even if AIG were to rid itself of the savings-and-loan subsidiary, the Federal Reserve may still designate AIG as a "systemically important financial institution" because of its size. That would subject it to other, stricter federal regulations for large financial firms, including higher capital requirements, stress tests and possible dividend and buyback restrictions.

The threat of increased regulation also caused some concern among investors, Sandler O'Neill analyst Paul Newsome said in a report.

The Treasury Department and Federal Reserve extended a combined $182 billion lifeline to AIG at the peak of the financial crisis, after losses on subprime-mortgage derivatives and credit rating downgrades forced the insurer to come up with a lot of cash quickly.

In exchange, the government received a nearly 80 percent equity stake in the company, a high interest rate on loans it extended and some level of management control including board seats and a say on executive pay.

Some of the bailout money was never used and the bulk of the remaining funds have been recouped through stock offerings and asset sales. AIG still owed U.S. taxpayers $24.2 billion before the most recent stake sale, according to the company.

TAXPAYER MONEY
The Treasury's sale comes as President Barack Obama campaigns for a second term and has been forced to defend his support of decisions to use taxpayer money to prop up companies during the financial crisis.

A White House spokesman said on Monday that the AIG stock sale represents a "commitment to recover taxpayer money" and that President Obama is pleased with progress in winding down the government's stake.

The administration has been unwinding its position in the politically unpopular financial crisis programs ahead of the November 6 election amid Republican campaign pressure over the role of the government in the private sector.

The government has recouped $342 billion out of $411 billion disbursed to financial institutions through the most prominent bailout, the Troubled Asset Relief Program, or TARP. But more than 300 small banks that received TARP funds have yet to repay taxpayers. Rescues of AIG and other large banks included other bailout programs.

"From the government's point of view, it's political," former AIG Chief Executive Hank Greenberg said in an interview on CNBC, adding that the government had hoped to exit its bailout investments much sooner.

AIG itself bought back $5 billion of its shares in the stock sale, with the rest going to the broader public.

AIG planned to use $3 billion worth of cash and short-term securities, and $2 billion in proceeds from the sale of its stake in Asian life insurer AIA Group to buy back stock from the government, the company said in a securities filing on Monday.

Repurchasing shares near their recent trading price - roughly 56 percent of book value - is likely to boost AIG's earnings through an accounting gain, but it will also reduce a good portion of cash, Greenberg said.

AIG's largest private shareholder, Bruce Berkowitz, declined to comment on the upcoming stock sale through a spokeswoman.

Underwriters for the deal include Citigroup Inc, Deutsche Bank AG, Goldman Sachs Group Inc, JPMorgan, Bank of America Corp's Merrill Lynch division, Barclays PLC, Morgan Stanley, Royal Bank of Canada's RBC Capital Markets division, UBS AG, Wells Fargo & Co, Credit Suisse and Macquarie Group Ltd.

AIG shares price at $32.50, cutting U.S. stake to 19 percent | Reuters