Wednesday, September 17, 2008

American Intl Group (NYSE:AIG): Colour on FED news - CSFB

CSFB comments on American Intl Group (NYSE:AIG) after the Federal Reserve announced that it was lending up to $85 billion to AIG, due mainly to the fact that the Federal Reserve Board determined that a disorderly failure of AIG would create too much turmoil to the global financial markets.

# This announcement raises several questions and/or observations specific to AIG:

# 1. The size of the credit facility suggests that the liquidity/capital needs at AIG may be substantially greater than we had estimated, implying that a considerable amount of the total value of AIG's businesses may not go to current debt or equity holders, but rather to repay the Fed's term loan.

# 2. The 11.3% interest rate of the term loan (if the entire facility is tapped), would shave about $2.00 per share off of EPS (before considering dilution from the Fed's new 80% stake), or about 50-60% of our prior EPS estimate. Combining the dilutive effects of the high cost debt plus the government's 80% stake in the equity would leave us with about 90% pro forma dilution for common shareholders (or about 30 to 40 cents in annual EPS).

# 3. The Fed's comment that AIG will pay off the $85 billion loan from proceeds from the sale of businesses, suggests that the majority of the company may be sold off in pieces. This is a staggering development, that the formerly largest global insurance company will potentially be unwound through a 1 to 2 year auction process.

# 4. What will the rating agency reaction be with the company operating with better liquidity but dramatically higher financial leverage assuming that it taps a large portion of the term facility? Both Moody's and S&P have the senior debt rated in the single A range, but there clearly is still risk that debt holders may not be made whole as the company sells businesses and pays down debt.

# 5. A fairly swift execution of sales of businesses will be important to avoid substantial erosion of franchise value, since customer lapse rates and withdrawals should remain elevated following the publicized difficulties at the company, and 6. Book value is likely to be hit hard by both bigger asset impairments and DAC charges associated with AIG likely moving to liquidation based valuation methodologies vs. the prior going concern asset valuations.

# With all of this in mind, CSFB's $3 price target for AIG common equity still seems reasonable though more of a best case scenario for the equity value in their view, if AIG does in fact look to sell off most or all of its businesses. With pro-forma EPS likely 30-40 cents, and pro-forma tangible book value in a $3 to $4 range, they would expect the stock to trade in a $1 to $4 range, toward the lower end if the debt fails to stage a significant rally, and toward the upper end if the debt and preferreds rally.

Notablecalls: Looks like my call to buy AIG in the $6's was only right for the first 60 mins of trading. This CSFB call gives a pretty good overview of the situation.

The FED did the only right thing they could do - bail out AIG. Otherwise it would have been pure exodus.

The stuff from LEH will hit the results of other players starting from Q3. I suspect we will continue to have wild swings in the fins until then. Goldman (NYSE:GS) continues to look like the best bet here. Risk is defined by book value, I think.


Primed said...

AIG bailout bad for taxpayers!!! Their insurance division is okay, only investment division was in trouble. Feds only used taxpayers money to bail it out because it allowed them to claim it as a potential moneymaker, when we all know Government controlled entities never, never are run profitably! AIG should have been forced into Chapter 13 bankruptcy (reorganization) and a foreclosure forced on its investment division.

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