Since about March of this year, AIG (NYSE:AIG) is fluctuating in a trading range of $27-35. It has become rather quiet around AIG since May, when the company announced another participation in the Treasury's sale of AIG common stock that were issued as part of a rescue package to save AIG from bankruptcy in 2008/2009. Other companies that were bailed out included Citigroup (NYSE:C), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and others.
I consider AIG to be the company with the most powerful catalysts ahead. I have argued that share repurchases below book value are going to be massively accretive to shareholder value. Given the amount of funds available for capital management (around $30 billion from the divestment of non-core assets such as AIA and ILFC and residual claims in the mortgage-asset holding Maiden Lane 3 SPV) I have ascertained, concurrent with management claims, that the entire sum will be used to repurchase shares from the government - very likely below book value. At least, this is my understanding from what the CEO, Benmosche, has stipulated during his investor conference presentations in February before the annual results were released. I do not understand why the market keeps discounting this huge accretion in book value per share. Considering that the announcement of the capital initiative plan is credible, which I believe it is, the book value per share is literally going to multiply - as long as the company can purchase stock below book value. I also understand that the process of deploying the capital takes up about 12-18month as Escrow for instance is restricted as well as the sale of further AIA shares.
Regarding the AIA shares I assume that AIG is going to sell them as soon as September comes, and the lock-up period expires. This of course requires that the stock market in Hong Kong remains relatively strong and allows for decent sale prices. Currently, AIA quotes at HKD27 with a 52 week high at HKD29.90. In addition, the IPO of AIG's airplane leasing subsidiary, ILFC, will depend on capital market conditions. I estimate sale proceeds of about $7 billion based on book value.
I have also previously assumed that there is considerable value left in the Maiden Lane SPV. Having retired Maiden Lane 2 already, Maiden Lane 3 is the only SPV holding mortgage assets left. I have predicted, that asset prices will likely increase going forward and both the Fed and AIG will be profiting from such increases. That being said, the Fed announced yesterday another milestone:
July 16, 2012: Net proceeds from additional sales of securities in Maiden Lane III LLC enabled the full repayment of AIG's equity contribution plus accrued interest and provided residual profits to the New York Fed. The New York Fed will continue to receive 2/3rds of residual profits generated by future sales of ML III LLC assets.
This comes shortly after the announcement in June, which notified the public that the outstanding loan balance had been retired already:
June 14, 2012: Maiden Lane LLC and Maiden Lane III LLC repaid the loans made by the New York Fed, with interest. The successful repayment of the loans marks the retirement of the last remaining debts owed to the New York Fed from the crisis-era interventions with Bear Stearns and AIG.
These milestone achievements, the remaining 1/3 residual interest in ML 3 and the capital initiatives are still heavily discounted by the market as a P/B ratio of 0.54 still suggests. I find it staggering that the market does not appreciate those repayment steps, considering that the company had been extremely punished for its role in the financial crisis but also over-delivered on its re-capitalization plan in 2011 and reached milestones sooner than announced.
AIG is one of my few absolute high conviction plays. Being heavily invested in AIG common stock already, going forward, I am going to switch over to AIG Tarp warrants which expire in January 19, 2021 and provide a greater risk/reward ratio.
Long-term oriented investors who have patience for the capital management program to unfold, might find AIG very interesting. In my opinion, the stock has tremendous upside based on AIG's share repurchases directly from the government. However, this scenario needs about 12-18month to play out as AIG will probably repurchase shares in installments. I consider AIG to be the turnaround story of the century.