AIG: Details of Its Punishing Bailout 18 comments
Michael Steinberg
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Finally we get the details of the draconian American International Group (AIG) bailout: “AIG SIGNS DEFINITIVE AGREEMENT WITH FEDERAL RESERVE BANK OF NEW YORK FOR $85 BILLION CREDIT FACILITY” The deal should certainly make the Fannie Mae (FNM) and Freddie Mac (FRE) shareholders feel lucky.
Funding: The GSEs will be forced to issue up to $100B each in 10% senior preferreds (12% if in arrears) to the government to cover any negative net worth. AIG is being given an $85B credit facility charging an interest rate of 3 month LIBOR plus 8.5%. All draws are conditioned on the Federal Reserve Board of New York’s satisfaction with AIG’s corporate governance, liquidity and other factors. Proceeds from asset, debt and equity sales are required to be applied to repayment of the facility, and these mandatory repayments reduce the amount available be borrowed.
The GSE agreements are like revolvers, the Treasury senior preferreds can be paid down and reissued as necessary. Unlike the GSEs, each dollar in the AIG facility can be borrowed only once. If AIG borrows $25B and repays that amount from asset sales, the open facility would still drop to $60B.
The GSE facility concludes at the end of 2009, but the senior preferreds don’t have to be paid down when the facility ends. AIG must repay all outstanding balances when the facility ends in 24 months.
Dilution: Both the GSEs and AIG will end up giving 79.9% of their common equity to the government upfront. The GSEs issued warrants. AIG starts by issuing preferreds (to be converted to common) that are granted the equivalent of 79.9% of voting rights and 79.9% of any common dividend. The GSEs’ conservator has the equivalent of 100% of their voting rights. The GSEs have eliminated both common and preferred dividends, while AIG only eliminated common dividends.
Fees: The GSEs' initiation fee was $1B each in senior preferreds. AIG pays a 2% initial gross commitment fee on closing, plus an annual commitment fee of 8.5% on the undrawn balance. This makes AIG’s net cost of drawing funds 3 month LIBOR, since they have to pay 8.5% whether they draw or not. It is not clear whether the basis for the annual commitment fee is reduced by mandatory repayments.
Conclusion: Both the GSEs and AIG lose 79.9% of their common equity upfront. The GSEs' initial commitment fee is 1%, compared with 2% for AIG. The GSEs sell equity, while AIG only gets loans. The GSEs' facility is revolving, the AIG facility is not. The GSEs pay only for the funding they need, AIG pays nearly the same whether they use the entire facility or not.
My rough estimate is that the facility could cost AIG $20B over the 24 months, in addition to the 79.9% dilution. The biggest difference between the GSEs and AIG is that most of the GSEs' cost of funding is variable while most AIG’s cost of funding is fixed.
The real question for investors is which if any of these companies will return to private shareholder control? I think there is a higher probability for AIG, but recent stock market activity is showing some life in Fannie and Freddie.
Disclosures: Author is long AIG, FNM and FRE.
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This article has 18 comments:
So AIG is giving 80% of its common to the government? If so, how is giving stock to the government "dilution"? Or it's issuing 80% more stock to the government on top of it's common?
Thanks in advance.
On Sep 24 11:51 PM aig1 wrote:
> Assuming AIG pays off the $85 billion loan within 2 years - what
> happens to Treasury's 80% stake? Does it get canceled or are we to
> assume that the US Government is a permanent shareholder no matter
> what?
On Sep 25 08:04 AM chrisbax wrote:
> no, the equity stake does not get canceled if the loan is paid back.
> The ceo stated as much, that after the loan was paid back the govt
> would convert thier shares at that time, diluting the company..but
> not ending the company
certainruin.blogspot.c...
Peace,
Dan
BTW: They put those shares up as collateral...If the loan is paid on time...the shares should revert to AIG.
The Government would get to keep the shares if AIG defaults on the loan...buy they have two years to pay it off....and I bet it gets paid off within 6 - 10 months (maybe faster).
Then the shares have to revert back to AIG.
The way you tell it is that the Gov charges 12% interest for a two year loan and then keeps all the collateral securing the loan.
That does not make sense on any planet.
Peace,
Dan
Disclosure and strategy:
I bought a sizable stake in the $ 2.20 - 2.25 area (sold half my position at $ 4.90) and will re-purchase on any further pullback that will solidify the long term technical base. I will keep selling half the position at $ 5.00 (= below the double top) and keep the remaining half as a long term investment.
Since I expect this extremely volatile stock to keep bouncing between $ 2 and $ 5 for the foreseeable future I expect to gain several $ 100 % gains while waiting for the stock to eventually break out.
www.businessweek.com/m...
Ex-CEO Greenberg sold 40 million shares at an average price of $ 3.77, so the fact that the price is holding above $ 3 despite a massive physical offload mens it seems to have found a floor.
Second, "AIG may get $115 billion by selling all its units, Credit Suisse Group AG analyst Thomas Gallagher said in a Sept. 23 note. The company may need to sell more than half its businesses to repay the debt, he said.":
www.bloomberg.com/apps...
This means that the Credit Suise analyst thinks there's a $ 30 billion cushion even at fire-sale prices.
Am very happy to hear contrary views (Cramer thinks AIG is worth zero!), though I believe my own opinion in this turbulent period is in fact the one that's 'contrary' ;-)
However, after dilution our 20 % equity stake will have a net worth of $ 11/share based on the Credit Suisse estimate above.
So essentially this is a good long-term value play. (If the Treasury had been obliged to return its 80 % stake it would have represented the deal of the century at a current price of $ 3/share and a net worth above $ 50/share!!!).
- Matt