Continued Good news on AIG

On May 4 The Federal Reserve Bank of NY (FRBNY) announced it is seeking bids for additional Maiden Lane III assets, called Triaxx CDOs, in response to inquiries from interested buyers. Nine broker-dealers were invited to compete for the Triaxx CDOs held within the Maiden Lane III portfolio according to a statement on the FRBNY website. Bids will are due May 10, this is good news as the auction is in response to several strong unsolicited inquiries for the assets. AIG’s eventual proceeds from these asset sales will fund further share repurchases.

On May 4 AIG also announced that the Department of the Treasury (Treasury) will sell another round of AIG common stock.  This of coursed caused the stock price to drop again. AIG indicated to Treasury that it intends to purchase up to $2 billion of AIG common stock shares in the offering. This follows the March 2012 sale of approximately $6 billion of AIG stock of which AIG purchased approximately $3 billion.

On May 6 AIG announced the Treasury had priced the offering of 163,934,426 shares at $30.50 per share. The underwriters are granted up to an additional 24,590,163 shares to cover over-allotments, if any. AIG will purchase 65,573,770 shares at the public offering price for the approximately $2.0 billion.

Recall our thesis is centered on AIG repurchasing shares of stock on our behalf at a significant discount to book value. At the price of $30.50/share about 65.5 million shares or 40% of the offering will be purchased at 53% of book value of $57.68/share. This is accretive to our holdings and further reduces Treasury ownership of AIG from 70% to about 63%.

Importantly this further supports our key assumption of a constructive approach to the recapitalization of AIG and their continued wise capital allocation. A positive surprise is AIG found another $2 billion so soon without proceeds from additional asset sales for the purchase of the stock. The drop in the share price is actually to our benefit, while AIG is a buyer a lower price means more shares can be purchased on our behalf at a greater discount. We need to focus on the increase to the underlying business value, not the day to day share price fluctuations.

The timing of Maiden Lane III and other AIG asset sales are critical so AIG receives the cash for additional share repurchases when Treasury decides to make them available. Hopefully this will be coordinated since it is in the best interest of the government and AIG to do so. There is some speculation that the government may want to exit the AIG positions before the elections. If so, our thesis may unfold sooner than we anticipated.

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