Is AIG a Buy Following the Government Bailout? 52 comments
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Based on CNBC, the stock is worthless when AIG (AIG) issues warrants to the government in exchange for the bridge-loan. Based on my simple Finance 101 calculations, AIG stock is not worthless and should be a buy as a long-term investment.
When I first read the deal, it does not make much sense – $85 billion loan for 80 % stake. How can you provide a loan for equity? The government gets the best deal because the loan needs to be repaid. So, the government will own 80% of the company without any investment in the company. I think any private equity firms would jump into this kind of deal. But will it be similar to convertible debt? If so, why don't they just call it convertible debt then?
First of all, the government is only providing a loan, not equity investment. The loan is for 24 months and should be repaid from the proceeds from assets sales. According to the Fed statement, "The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries, and of its primary non-regulated subsidiaries." This is what AIG intends to do anyway. But the government wants some insurance that AIG will perform according to the agreement. So, the government requires AIG issuing warrants as a condition to obtain the loan. The warrants can be converted to 80% ownership.
As I understand, warrants are basically options issued by the company. Warrants are not stocks until they are exercised. So, we can only say there is a potential dilution of ownership if exercised by the government. The government is not in investment business looking for profits. The government is providing the loan to avoid a financial meltdown. So, if AIG performs as promised, the government should not exercise those warrants, and the current ownership will not be diluted. I expect the warrants in the hands of the government are used to ensure AIG will perform accordingly. If AIG's performance is not satisfactory, then the government can exercise the warrants and take control of the company. At that time, the government can actually replace the AIG's board and the executives.
Since the government funding is a loan, the warrants should be canceled once the loan has been fully repaid. Furthermore, if AIG's financial condition is stable and secure, AIG can buy back the warrants from the government.
Let's deal with AIG valuation. Since the government provides $85 billion for potential 80% ownership, the remaining 20% should be worth $21.25 billion. Yahoo finance shows the total number of shares outstanding is 2.69 billion. Therefore, the current 2.69 billion shares should worth about $7.90 per share. This valuation method is a simple comparable sales technique, nothing fancy at all. If this makes sense, then you should buy AIG for long-term investment.
A few points that I want to emphasize:
1. AIG is a solvent company, but it just needs time to sell some assets for raising capital. AIG has a lot of viable business units.
2. The government assistance is not a bailout because the company is solvent. This is why AIG wants a bridge-loan to buy some time in order to facilitate the necessary sales. Instead of fire sales getting low prices, now AIG can sell the assets at more reasonable prices.
3. The loan package is for warrants, not convertible preferred. This indicates the government is not interested in owning the company long-term.
4. It makes no sense to me that the government wants to wipe out the current shareholders of a solvent company.
One side note: if the government was willing to provide the bridge-loan on last Sunday when it was first requested, the loan amount was only $20 billion. AIG needs more funding now because of the downgrades by rating agencies on late Monday. Because of the downgrades, AIG needs to post an additional $14.5 billion as required by its trading partners. Also, AIG could pay additional $5.4 billion payments for early termination of contracts. Therefore, because of the time delayed, AIG needs more funding.
I am not sure then why all the media claim the current stocks are worthless. Your thoughts.
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This article has 52 comments:
I say next we take over the oil companies, and this time make some profits on the way up and not just losses as with AIG.
finance.yahoo.com/q/ks...
$89 BILLION IN REVS / 2.69 BILLION SHARES = $33.09 PER SHARE IN REVS
$33.09 X 79.9% = 6.65109 IN SALES ALONE
This, in my opinion, is a clear violation of the constitution and the fiduciary and executive authority of the treasury!
AIG has a tough road ahead with owing 85 billion at an astounding 11%
I dont think there will be any profit for a long long time..not to mention they have to sell assets at depressed levels (albeit not as depressed as if they went into BK) but still the market place is not great. They will have to sell A TON to pay off 85 billion, and most likely they will not be able to do it, leaving the govt. to own the most profitable portion of the business, the insurance part..
Without using any of the money so far, they have already made gains by receiving upgrades which in turn reduces the amount of collateral which they must have on hand. If they would have never received a loan, and if they were not downgraded, they would have probaly made it through this mess on their own. The rateing agencies were about two years two late in doing their jobs. I agree the real value of the company is not the 85 billion which was loaned but another yet undetermined amount which I believe will be more tham85 billion.
Cannot believe a guy like him could be writing on Seeking Alpha. It is not a loan, it is a rob. I lent you some money for 10% interest rate a year. In return, you will pay me back my principle plus interest in two years but I get to own 80% of your house.
From everything discussed to date by the pundits, the warrants issued to the government gave them 79.9% of AIG in consideration of simply granting the lone. Nothing more...nothing less. No mention of forgiveness except a reference in some article to incentives for paying back the loan promptly. What those incentives could be is also an area of vast speculation. Until the government releases the agreement (or AIG for that matter) we are all dealing in the dark.
Think about it... if someone propositioned you with that offer would you accept? Bankruptcy would be a much more attractive alternative. Why would you put yourself through all the effort of saving the business at a ridiculously high interest rate loan, only to be "rewarded" with losing most of your company.
If that were the deal, it would be far more profitable to declare BK, walk away, and start a new business sometime later.
Think about it.
If this we're an arms-length transaction operating in a M&A sense, then fine. But this is the US Government! And, they're making a huge decision with little (no) due diligence, little (no) industry expertise, and under huge duress! Could conditions be worse?!
I have no idea what AIG is worth today, let alone what it may be worth a few years from now. But I can't cozy up to the author's logic behind his valuation approach.
Has anyone seen an earnings forecast? Are there earnings??? That's what I'd be looking at to do a valuation (after discounting the balance sheet assets by some aggressive figure like 50%).
Why on God's green earth would AIG take an 11%+ loan for $85B if they didn't think the company was worth considerably more than that?
Would you take a $500k loan with 11% interest to save your house thats only worth $100k?
I would wager thats the real reason LEH went BK. They realized at that point it was the smarter decision. This is a steep price for AIG to pay, so they most feel very strongly it is well worth it.
Think about it.
Also, keep in mind that AIG may not need to borrow on the $85 billion line of credit anyways. AIG's problem has not been cash flow. The rating agencies downgraded them only because of their inability to raise more capital if needed to shore up collateral due marking to market of some of their debt. The warrants for 79% of the company are only good if AIG fails to payback anything they drew off the $85 bil line of credit. Again, that could very well be nothing. I think AIG is steal here at just over $2. But, like is I said, a lot less risk buying AVF or AFF as you get paid to wait to see what happens.
Joe Eifrid
The situation is that the government has loaned up to $85 billion to AIG via a credit facility for up to two years. In exchange, the debt must be repaid from asset sales and carries an 11% interest rate. In addition, the government demanded extra compensation in the form of warrants that grant a near 80% stake in the company. The point of the warrants is to discourage other companies from trying to use Uncle Sam's credit; its a punitive measure to push private market participants back into the private market unless there really is no other way.
On the flip side, I do believe AIG is solvent, simply not liquid. As a result, the loan will allow them the time ot liquidate in an orderly process. In the end shareholders will get some renumeration, but I do not know what will be left after the asset sales - no one does until the bidding begins.
The company is too much of a conglomerate to figure out what it will fetch, although history tells us that large conglomerates tend to bring more in pieces than as a whole (see Ma Bell/AT&T+Baby Bells for example).
I just read the prospectus on AVF and AFF and it says that AIG can defer the dividend for up to 40 quarters without causing a default.
I wouldn't be holding your breath on that 55% yield.
"The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders."
At these levels, its probably still a buy. But its definitely not the opportunity of a lifetime as I previously thought.
More importantly, what is Uncle Sam's motivation to ever let go of their 80% stake? They just sunk their teeth into the biggest insurance company out there for pennies on the dollar and will get paid to do so. It seems inevitable that this will transition into some form of nationalized insurance program.
This is bad.
Also, AIG is "too big to fail", which means that in the worst case the U.S. Government will throw good money after bad: There's no way it will write off its initial $ 80 billion, but will increase the loan if AIG needs more time to recover.
I bought a substantial stake (by my standards) last night at $ 2.20, because I don't consider it speculative but strategically misunderstood by investors: AIG cannot and will not be allowed to fail, which offers considerable upside. My 5-year target is minimum $ 20, which is a good risk:reward for a stock which is backed to the hilt by U.S. Government funds, giving it a sovereign guarantee that is AAA.
My personal target is $ 40 in 5 years' time, but this is just an arbitrary figure depending on developments and I may eventually chicken out for a 100 % profit at $ 5! I'm just happy that I today I bought huge amounts at $ 2.20 - 2.25, because I just don't see bankruptcy as even a remote option any longer.
I just doubled my money on AIG in 24 hours.
But what I had in mind longer term, was that perhaps AIG would turn out like the Royal Trust affair in Canada a couple of decades ago. The Royal Bank of Canada ended up with the solid part of the business, but so as not to leave shareholders with nothing, a new company called Gentra was created and the crap that nobody wanted was dumped into that. If you held on to Gentra, you actually got most of your money back several years later.
So I am hanging on to a couple of hundred shares (which are now free) to see if something like that happens or perhaps a miracle will occur and AIG survives relatively intact.
Time to move on.
About the "loan agreement", I don't think anyone really understand it. I also read about it is actually an "equity participation note". In other words, it is a loan but sharing equity characteristics. We can argue what specific word means, but the bottom line is the US govenment is providing a loan to AIG so it has time to sell some assets without triggering a fire sale selling at rock bottom price. Then, in order to protect the loan being default, the government requires all assets as collateral. More important, AIG basically cannot pay dividends until the government loan is repaid first. Also, the equity allows the government to replace directors and executives if necessary. The equity feature is providing the US government some rights to protect itself, but I really don't believe the US govenment want to own the company and make profit out of it. The loan already provides about 11% interest.
When I first write the article mentioning "warrants" because this is what the media called it. Now, I know a little bit more. Since it is an equity participation note, there is no exercise price. In other words, the US government already "owns" AIG through the note. At the same time, when AIG pays off the loan, then US government is out of AIG also. So, once AIG sells its assets, rearrange its business model and pay off the US government, AIG remains independent.
I am glad "anon10" agrees with me and "bought a load of AIG". The stock basically has doubled after your purchases. You may consider taking some profit now. In the long run, AIG is still a good company, but it will have short term fluctuation. So, you may have a chance to buy it back at a lower price later. You may think about only selling one-half to recover all your costs. Now, whatever AIG you own is your profit.
I really wish all of you can come to my site and make some comment on my other ideas. You can even post your ideas on my site.
www.sec.gov/Archives/e...
"The summary of terms also provides for a 79.9% equity interest in AIG. The corporate approvals and formalities necessary to create this equity interest will depend upon its form."
This is how these things work - see full analysis including analysis of AIG's SEC filings at my website
1. Mr. Greenspan said this financial crisis is the one that wouldn't come in 100 years. If you reverse it, it means the greatest investment opportunity has come in US history. Right beside the greatest fear sits the greatest hope. In the recent market turmoil, the only private sector company that's got hit the most but dramatically saved by the US government is AIG. I've never seen a private-sector company being saved at this grand scale. As you all know, this is the first case of saving an insurance-related company by the US government. Probably, that's why I'm riding and enjoying this turmoil even if I'm a newbie in stock investment.
2. AIG is way too big and too influential to let it fall. You can see the difference of US government's attitude from Lehman and AIG. If AIG fails, even Boeing will be hit hard, and the ripple effect will spread like crazy to other areas. The media will definitely act a huge role in spreading this ripple effects.
3. Primary purpose of the 2-year maturity commercial line of credit is to help the giant walk and run again, not to liquidate the business assets and wipe out the shareholder value. The line is not to control and kill the giant. Rather, its purpose is to preserve the shareholder value of the giant and to stabilize this unseen, crazy market in US history.
4. The US government absolutely has no interest or intention of owing the giant. Not a single penny of the giant. Nationalization? What a great non-sense it is! As soon as the outstanding principal balance of the commercial line of credit including accrued interests and late charges, if any, gets paid as agreed in two years, the US government will say, "You are ready. Go ahead and walk alone now, giant!" The media which has no idea as to how commercial line of credit works is creating this unnecessary commotion all over the US, saying things like, "if the line is not paid off in 2 years, US government will seize control of AIG and wipe out shareholder values". This type of non-sense is driving people and investors into more panic and fear of loss, driving down the stock prices of strong US companies more and more. I wonder if the media including some of the opinion writers of this web site knows how commercial line works. I know the terms and conditions of the bailout loan must have their own peculiar provisions specifically tailored for this peculiar situation, but in general, they will also follow general lending practices of US because it is a commercial line of credit extended by bank. If the situation of AIG or the overall market does not improve, AIG has the right, as borrower, to request extension of maturity of the line by additional one or two years .Even if the line cannot be paid off by the additional maturity, AIG has the right, as borrower, to request to term out the line balance into 5 years, 7 years or even 10 years so that monthy principal and interest can be paid until the loan gets paid off. This dramatic event will not happen in 100 years. Why term-out of the line balance into a 10-year maturity loan be unthinkable in this type of market meltdown that the Oracle compared to the breakout of WWII?
5. The new CEO, Edward Liddy, as you all know, will restructure the giant. He has the extensive and professional knowledge and experience through Sears and its spinoff back in 1990s. I reviewed AIG's corporate structure. I've never seen that type of messy structure. If the new CEO establishes transparency through simplification of all those holding and business units which include weird and absurd skii resort investment, real state investments all over the world, sports sponsorship and other non-sense investment units I don't have knowledge of, AIG will walk and run again in less than 2 years. It appears that the US government wants to see a new AIG that focuses and concentrates on one primary business field, whether it is insurance or airplane leasing business, to survive and thrive.
Let's see if AIG becomes a total loss in two to five years just like all media is saying.
Can be bought on Scottstrade.
Credit Suisse believes AIG can sell $ 85 billion of assets immediately and still have $ 30 billion left over, which represents a remaining net worth of around $ 11/share.
Since this company has been saved from bankruptcy by the U.S.Government, so how low can it go??? Those people holding out for an opportunity to purchase at the old low of $ 1.25 can dream on ......... I loaded up at $ 2.20 and definitely see $ 40 in about 2 years' time, though I'll probably chicken out and liquidate my holdings beforehand ;-).
P.S., I wouldn't be surprised if the price exceeds $ 5 once the $ 700 billion financial bailout is approved by Congress.
edition.cnn.com/2008/P...
Q: The government has said the rescue loan is backed by AIG's considerable assets, which total about $1.1 trillion. If reports are correct that the government is planning on selling off many of these assets to get its money back, why does it need to issue these bonds?
A: Two separate issues. Regarding AIG, the government gets 80 percent of the assets as collateral. They're not free to sell them. The company has to sell them, and as they do so and repay the government, the 80 percent hold can be diminished. You may not need any of that to cover AIG.
The bond issuance here has got more to do with the fact that the reserves that the Fed keeps have dwindled from about $800 billion to an estimate -- and I should tell you that's an outside estimate, not the Fed's estimate -- of about $200 billion, so they are just looking for methodology to increase the reserve. I don't think it's meant to say that the Fed is losing $85 billion of its $200 billion, and that $85 billion is covered. It's a separate transaction. It's the idea that we need to have enough money to keep Wall Street confident that we can move in and rescue a bank if we have to.
The latest drop (today 25% drop) due to new developments ... was it a correction on something that someone from the other side of the world (like me) don't know?
Regards.
To answer your question, even though it seems AIG needs more money than expected as it has draw down more funding, I still expect the stock can do well in the long run. The is particular true as the global central banks are coordinating to stable the financial markets.
Is this still a good boat to jump or is it SINKING?
Insurance is a key feature in a growing economy because it allows risk to be mitigated by spreading out over many investors.
That said in order for you to take part in 20% of the upside (since gov effectively owns 80% and don't assume government would be adverse to profiting), AIG must in the form of liquidation of their assets and operational income generate retained earnings in the excess of $170 billion+10% interest rate (more if you factor in operational costs).
Also not only do you got to take into the complexities of their huge world wide operation which makes it almost impossible to analyze, you have to consider the vast amount of accounting fraud that would be endemic to such a system since such a complicated, obscure structure would allow many financial misdeeds to go unnoticed (Enron?).
Besides with the protest with the current AIG bonuses, they are in danger of both losing a lot of their most promising employees who frankly had made a lot of money for the company and are in high demand and pissing off the public whose political pressure may cause the company to lose their liquidity life line.
With that caveat, I think you should invest only the amount you are willing to lose. It's a good gamble. The company is guaranteed not to go bankrupt so you won't suffer gambler's ruin and payoff odds are pretty good. My advice is to gamble and if it rises sell like it's a bomb because it is. AIG's long term business strategy seems to be picking pennies in front of bulldozers. You look at their earnings history they deliver steady returns on highly leveraged investments and then lose more in one year than what they made in the last ten years combined. Besides only an idiot savant with an uncanny ability to detect accounting fraud will be able to discern book value of that behemoth.
Also if you think the regulators are going to be on the ball with AIG then will you tell me your phone number? Me and my Nigerian rich brother wants to transfer $1,000,000 worth of oil barrels into US but we need to pay $5,000 in Ameerican to the brooker. You rich quick.