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In our last article, we wrote about how AIG (NYSE:AIG) shares are significantly undervalued, and the company has shored up its balance sheet by getting rid of risky assets in its portfolio. Buying shares is one way to way to play this lack of love AIG has been feeling from the Street. Another way to play it is buying the $25 denominated 7.70% Series A-5 Junior Subordinated Debentures (NYSE:AVF).

AIG $25 denominated 7.70% Junior Debentures ($25.77, September 11, 2012)

Basics

  • Symbol: AVF
  • Principal Amount: $25
  • Coupon Rate: 7.7% or $1.925 before December 18, 2047. Three-month LIBOR plus 3.616% thereafter.
  • Call Date: December 18, 2012. AIG can redeem all ($1 billion), but not in part before if a "tax event" happens or a "rating agency event" occurs anytime before December.
  • Mature Date: December 18, 2062, which can be extended to December 18, 2077
  • Distribution Dates: 3/18, 6/18, 9/18 & 12/18

Risks

  • Company: As mentioned in our last article, AIG is in great shape as they have gotten rid of the risky assets that plagued them during the financial crisis. Even during the financial crisis, this security continued paying a dividend. The company is still critical to the U.S. financial system.
  • Rank: This security is junior to all AIG senior debt. However, this should not be a problem as the company is in great financial shape.
  • Deferral of Interest: The company can defer interest payments up to 40 quarterly payments without giving rise to event of default. The deferred interest does accrue. They have and will probably never defer interest payments.
  • Call Date: The security can be called partially or fully after December 12, 2012. Currently, AIG is spending a lot of money buying its shares back, but if interest rates continue to decline, then it is possible they will at least partially call the security. Thus, it is important to buy it around the principal amount.

Before September 13, 2012 (ex-dividend date), I would buy AVF at any price under $25.70. After the dividend, I would buy AVF at any price under $25.20 because the $.48 dividend in December is pretty much guaranteed.

Read the full prospectus here.

Disclosure: I am long AIG. I may initiate a long position in AVF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: A Safe 7.7% Yield From AIG