(Bloomberg News) American International Group Inc., the insurer rescued by the U.S. government, sold $2 billion of bonds in its first offering since the bailout in 2008.
AIG issued $500 million of 3.65 percent notes due January 2014 that yield 295 basis points more than similar-maturity Treasuries, and $1.5 billion of 6.4 percent debt due December 2020 at a spread of 362.5 basis points, according to data compiled by Bloomberg. The bonds rose in trading today.
"AIG's ability to access private financing is an important step for that company toward future independence," Mark Paustenbach, a spokesman for the Treasury Department, said in an e-mailed statement. "It demonstrates growing market confidence in the progress AIG has made both in stabilizing its operations and in putting itself in a position to repay all of its obligations to U.S. taxpayers."
Chief Executive Officer Robert Benmosche tapped the corporate bond market after announcing on Sept. 30 a plan to pay back taxpayers and regain the firm's independence. AIG, based in New York, expects to repay a Federal Reserve credit line with proceeds from asset sales and convert the Treasury Department's $49.1 billion stake into common stock by the end of March. The government may then sell the shares on the open market.
Orders for the bonds "showed the pent-up demand for the AIG name," said Anne Daley, managing director at Barclays Capital in New York, which helped underwrite the sale. "We're getting close to the end of the year, and we felt there was a compelling opportunity to get the size in and out of the market in one day, so we decided to move forward."
The price of AIG's newly issued debt rose in secondary trading, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The 3.65 percent notes gained 0.83 cent to 100.8 cents on the dollar to yield 179 basis points more than Treasuries as of 8:39 a.m. in New York, Trace data show. The 6.4 percent debt added 0.33 cent to 100.07 cents on the dollar, a spread of 349 basis points, according to Trace.
"It was a good deal because it was relatively cheap," said Michael Donelan, who oversees $3.5 billion of bonds as director of trading and head portfolio manager at Ryan Labs Inc., a New York-based money management firm that purchased some of the debt AIG sold yesterday. "They priced it at concession, but not as much as what we would have hoped."
While the cost to protect AIG bonds from default has declined this year, it rose in November. Corporate bond issuance has tumbled amid concern that Ireland's debt woes will spread across Europe and slow the global economy.
'Lot of Angst'
"There's a lot of angst right now in the marketplace, so I think anyone would've been better served to come a couple weeks ago," said Lon Erickson, a money manager who helps oversee $9 billion of fixed-income assets for Thornburg Investment Management Inc. in Santa Fe, New Mexico.
The insurer sold the debt at spreads wider compared with similar-maturity Treasuries than companies with similar credit ratings. Investors holding debt graded A demand an average spread of 121 basis points on notes due in one to three years and 175 basis points for bonds due in seven to 10 years, according to Bank of America Merrill Lynch index data.
Proceeds from the offering will be used for general corporate purposes, AIG said yesterday in a regulatory filing. The senior unsecured notes were rated A3 by Moody's Investors Service. They may be rated A- by Standard & Poor's, Bloomberg data show.
"We're pleased with the market's reception to our offering," Mark Herr, a spokesman for AIG, said in an e-mailed statement.
The insurer must earn standalone investment-grade ratings to execute its repayment plan, which hinges on selling bonds and stock to private investors as the government withdraws support. AIG will get a $2 billion Treasury backstop for emergency funding until March 2012 or until the insurer sells at least $2 billion in equity.
Five-year credit-default swaps tied to AIG climbed 13.8 basis points to 259 basis points yesterday, the highest in nine weeks, according to data provider CMA. While the contracts, which typically fall as investor confidence improves, have declined from 581 on Dec. 31, they've risen from 211 at the end of October, CMA data show.
AIG will focus on global property-casualty coverage and U.S. life insurance after selling its two largest overseas life insurance divisions, AIA Group Ltd. and American Life Insurance Co. In October, the company divested a 67 percent stake in AIA for $20.5 billion in Hong Kong's largest public offering. MetLife Inc. paid $16.2 billion for Alico on Nov. 1. Fortress Investment Group LLC said yesterday it had acquired 80 percent of AIG's consumer-credit unit, American General Finance Inc.
AIG's third-quarter profit from continuing insurance operations climbed 6.4 percent to $2.05 billion. The company has made "huge progress" in its restructuring and will emerge from government ownership ranked among the world's largest insurers, Benmosche said Nov. 5. AIG's stock surged 38 percent this year. The company's shares fell 24 cents to $41.29 yesterday in regular New York Stock Exchange composite trading.
The insurer, once the world's largest, was rescued in September 2008 by the Fed. The firm's lifeline includes a $60 billion Fed credit facility, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by AIG.
In August 2008, AIG raised $3.25 billion in its previous sale of corporate bonds, according to data compiled by Bloomberg. The insurer sold 8.25 percent, 10-year senior unsecured notes in a private placement that priced at par to yield 432.8 basis points more than similar-maturity Treasuries, Bloomberg data show. A basis point is 0.01 percentage point.
"The markets have increased confidence in AIG's ability to service debt on an ongoing basis, and, by extension, in its feasibility as a sustainable enterprise," said Clark Troy, a senior analyst based in Chapel Hill, North Carolina, for Aite Group, a research firm.
Bank of America Merrill Lynch, Citigroup Inc. and Morgan Stanley also managed the offering for AIG, according to the prospectus.
"It's a good thing to test the capital markets and see what kind of answer they get," said Erickson. "It'll be a good clue to see if they're ready to stand on their own."