More cheery news on the credit crunch front. Readers may recall that AIG entered into what was initially an $85 billion and was later increased by $38 billion with no further strings attached. The terms of the initial loan are pretty punitive, with the government loan having a two year term, a high coupon, and the government also received warrants for 80% of the firm.
AIG thus has a strong incentive to repay the loan as quickly as possible; indeed, it made a last-ditch effort to unload assets and secure other funding so as to avoid having to take the government’s terms.
AIG’s businesses are, on the whole, believed to be very solid. The insurer’s troubles result from writing a large number of credit default swaps.
However, the possible buyers who are nominally cash rich right now, private equity firms, are used to doing deals with lots of leverage. So with money scarce all around, they are making offers that are lowball even in this environment. However, strategic buyers, meaning other insurers, may step to the fore.
From Reuters (hat tip reader Steve):
Insurer American International Group Inc’s asset sales are taking longer than hoped as credit for deals is tough to come by and potential buyers wait for bargain prices and sometimes grapple with their own problems…
AIG plans to keep its U.S. property and casualty, foreign general insurance businesses, and an ownership interest in its foreign life operations, but sell the remainder….
But so far the company has announced just one deal: selling its stake in the London City Airport for an undisclosed price.
“No one has really stepped up to say: ‘Here’s X dollars of cash. Let’s get the deal done next week’,” said a financial services banker representing a potential buyer. “Everyone is just sort of lining up, saying: ‘Yes we are interested.’
“But it’s a chicken and egg situation, because if you wait long enough, a la Barclays-Lehman, you may be able to get this cheaper,” said the banker, who requested anonymity because of the sensitive nature of the sale process….
Chief Executive Edward Liddy said on October 3 that the company had several potential buyers interested in its assets, but declined to say how quickly he expects any deals to be signed.
“I want to balance speed with value,” Liddy said….
“They can’t really look to the banks to be ready lenders like they used to be,” said Robert Ellis, a senior vice president at financial research firm Celent.
Moreover, several insurance companies that could be interested in some of AIG’s businesses for strategic reasons are dealing with problems of their own.
On Thursday, Fitch Ratings revised the outlook for 12 insurance and reinsurance sectors globally to negative from stable, citing increasing pressure on balance sheets and investment portfolios.
Still, many of AIG’s assets could eventually lure bidders including billionaire investor Warren Buffett, who has said his Berkshire Hathaway Inc insurance and investment company would consider buying some units.
AIG said it received offers for Philippine American Life and General Insurance Co — that country’s biggest insurer — from around 10 local and foreign investors, including private equity.
Earlier this month Liddy said AIG was in advanced talks with one potential buyer for part of its U.S. personal lines unit.
Liddy has said he does not expect the divestitures to turn into a fire sale, but experts said AIG may have to sell some assets cheaper than they would fetch in normal times.
“Even at lower prices, it is difficult with the (credit) markets the way they are,” said William Bates, a mergers partner at law firm King & Spalding. “It’s a good thing they have two years to do it.”