The demise of AIG has been well documented in the business press over the last year. The company’s insatiable thirst for cash to satisfy its derivative contracts will likely become the stuff of legends in future business school case studies.
While the company has survived in its pre-bailout form since September via the use of government funds, it has not been easy. The high interest rate on the government money has and will likely continue to make it difficult for AIG to operate in its current state for a prolonged period. Fortunately, AIG’s management team has vowed to take proactive steps to reduce the company’s debt level in 2009 via the sale of non-essential divisions.
Unfortunately, these efforts have so far seen the company take one step forward while at the same time taking one step back. It now appears entirely possible that the valuations that the company’s assets deserve in the event of the sale will likely not be achieved during 2009. This is unfortunate, as it will likely put tremendous pressure on the company.
Over the last several weeks, investors have learned in greater detail how the company’s divestment activities are doing. While the disclosure that AIG could bring in over $8 billion from the sale of its International Lease Finance Corp. to a variety of sovereign wealth funds is certainly welcome news, it is more than offset by another significant disclosure. Namely, the possibility that the company will sell its asset management division at a price that would have been absurd only a year ago.
A significant driver of this reduced sale price has been the decline in assets under management. While a certain percentage is certainly as a result of the markets collapse, it is clear that withdrawals have soared. At the end of September, AIG’s asset management unit had over $676 billion under management; however, recent reports put this figure at only $210 billion. This decline, when coupled with a decline in valuations likely means that the unit’s current value to AIG has declined by over $10 billion dollars in only a quarter. This type of value erosion is an ominous sign as AIG seeks to sell other non-core assets.
Should the sale of AIG’s asset management unit go through, as rumored, it will be to the detriment of the federal government and AIG’s current shareholders. Despite a lack of divestitures of any significant foreign holdings, it is already readily apparent that the federal government must renegotiate its advance to AIG in such a manner so that it lowers the company's interest rate on its loan. This should give AIG’s management more time to sell off assets over the next several years, once asset prices and valuations return.
Disclosure: Long AIG
