A Possible 10 to 1 Bet on AIG

In May 2008 AIG (AIG) sold common stock at $38 and a "preferred" AIGprA at $75/share. The preferred is a mandatory convert in three steps of $25 each, hence the unusual offering price of $75. The securities are officially referred to as Equity Units.

This preferred has some interesting characteristics that are being overlooked by the market in the current chaos. First of all, the securities are "junior subordinated debentures" that have a mandatory conversion into the common in Feb., May. and Aug. 2011. The cash distributions are interest payments (not dividends) and if not paid, are cumulative. I assume that cash distributions will be deferred, but they will accumulate.

When converted in 2011, the preferred will convert into 2 AIG common shares + additional shares for any accumulated but unpaid cash distributions. These unpaid distributions will be very important because they are $6/share annually. That is 100% of the current price of $6.

The liquidation value of the securities is $75/share. Of course, there are lots of senior securities ranking ahead.

There is other language in the prospectus which was written when the current situation was beyond imagination. "Make whole, change of control, etc." Remember, these securities are debentures and regardless of their junior status, if deferred interest isn't paid in cash or stock by 2011, AIG will be in default.

Do your own research. Search the Edgar site for the prospectus issued May 12, 2008.

Disclosure: Long

Comments

[sumosama:]

What is the symbol for the preferreds? Thank you for a great article!

2008 Sep 19 11:25 AM

[Traptinus:]

More details are available at quantumonline.com. CUSIP is 026874115

2008 Sep 19 12:08 PM

[Chris B:]

High yields mean high risks. Preferred shareholders of Fannie and Freddie were wiped out just like the commons. The government's first priority is to protect the foreign investors who finance the national debt.

Besides, as an insurance co. insuring mortgage securities from defaulting, AIG is a leveraged bet that defaults will not continue to rise, even has home prices fall another 20% to their historical trendline. We're not there yet. The risk is huge.

Yet, if you are fortunate enough to be in the position of a professional analyst, there is a chance that through dilligent homework, you could find the deal that makes you rich. I suspect it's not this easy.

2008 Sep 19 12:10 PM

[Traptinus:]

The filing is at www.sec.gov/Archives/e...
Not an expert at reading this stuff but at a minimum this will force you to buy from AIG @$25

2008 Sep 19 12:13 PM

[Gerry Sullivan:]

The AIGprA is different from the Fannie and Freddie preferreds. The AIG is a debenture, a debt instrument. Fannie and Freddie issued true preferreds. The Fannie and Freddie preferreds dividends are not cumumlative if not paid. The cash payments on the AIGprA accumulate if deferred.
The annual cash distribution on the AIGprA is $6.375. If not paid, it is cumulative. Part of it will become additional shares and part of it will become additional debentures.
The conversion rate for each AIGprA is approximately 1.97 shares. If the cash distributions are deferred, they compound at about 5.67%/yr.
Check the prospectus. Lots of moving parts, but a very interesting opportunity.
www.sec.gov/Archives/e...

2008 Sep 19 02:55 PM

[Gerry Sullivan:]

I bought this AIGprA on Wednesday and sold it today. I currently have no position in AIG.

I am looking at the AIG listed notes, the American General Finance notes and International Lease Finance notes. The latter 2 are AIG subsidiaries.

2008 Sep 19 03:03 PM

[PeteK:]

To buy AIG shares now for a few bucks a share, I feel safe.
A gamble I am willing to take. After all, the stock-market is nothing but a big Casino anyway.

2008 Sep 20 05:45 PM

[pitaking:]

Got long AIG on Friday, with what I think is a nice risk/reward over the next 10 days. Shorts will be running for the exits and with it being as oversold as it sits(daily rsi of 22, weekly of 19), money should keep coming in, even if just for a trade. Market manipulation is on and with Bush and Co owning a huge chunk of the company, they'll make sure it continues to pop.

2008 Sep 20 09:02 PM

[elwind45:]

Fedz could fold AIG and fan/fred together and solve most of its R.E. problems. Cash flow from AIG would go long way to stablish the situation. Fedz could buy AIG paper from banks and score the equity as a asset in trust?

2008 Sep 21 03:39 AM

[User 266610:]

What's the latest about Kraft Foods (KFT) to replce AIG?

2008 Sep 21 05:59 AM

[PeteK:]

What it means is that KFT now replaces AIG as the world's biggest company. Correct ?

2008 Sep 21 07:59 AM

[buyitcheap:]

There are some GM preferreds that are similar - trading in the 60s. Very interesting- these notes will have to be rolled over at worst and the holders compensated. ha! No seriously, they'll default on all of it. Go find a better low risk trade.

2008 Sep 21 11:42 AM

[rcraig:]

I feel very ill I sold my shares of KFT a little over a year ago.If the market wasn't down so low I could sell off some excess and reenter with holdings in KFT.
I just din't see the train wreck coming.
I wonder how big holders like Bill Clintons best friend Eli Broad and Dick Rhordin are doing with their shares of AIG?

2008 Sep 22 05:54 PM

[marauder:]

What does mandatory convert mean. Has the $75, 3 x $25 been paid so you will get the stock at conversion, or does the 75 still need to be paid at conversion?

2008 Oct 21 10:54 PM

[yahoo11:]

"when converted in 2011, the preferred will convert into 2 AIG common shares "

Gerry, at current prices, the prospectus says it will give you 0.6579 common shares per AIG-A, not 2.

Sep 24 08:35 PM