AIG Plans to Offload AGF – Analyst Blog

In order to attain funds for repaying the government’s bailout amount, on Wednesday, American International Group Inc. (AIG) reportedly publicized its intentions to vend off its consumer finance unit, American General Finance (AGF), according to the Financial Times. However, the amount AIG expects to raise from the AGF sale or the preference of any buyer remains undisclosed.

 

AGF constitutes 1,200 branches with 1 million customers across the U.S. In 2009, this AIG unit recorded an operating loss of $800 million due to loan defaults in lower-income consumers segment that soared given the downturn in the funding market. Hence, AIG has been reportedly hunting for potential buyers and has appointed Bank of America Merrill Lynch, a wing of Bank of America Corp. (BAC) to organize and sell its non-core consumer finance unit, in order to raise money for Troubled Asset Relief Program (TARP) repayment.

 

While some undisclosed buyers are interested in the deal, the risks of current market volatility and inability of short-funding in AGF are expected to adversely affect the process of sale and its final pricing.

 

AIG is desperately seeking the asset-sale approach to get rid of the government bailout loan of about $180 billion, taken during the height of financial crisis in 2008. Currently, the U.S. government enjoys about 80% stake in AIG. Accordingly, AIG is progressing steadily with its divestiture program to repay the government loan. Alongside, an acquisition of AIG’s American Life Insurance Co. (ALICO) unit for about $15 billion remains pending with MetLife Inc. (MET) and is expected to close by the end of 2010.

 

Further, AIG is also working on to divest its Asian life-insurance unit, American International Assurance (AIA) to U.K.’s Prudential Plc. (PUK), whereby Prudential can help attain a leading position in the Asian markets. Subject to other closing terms of the deal, the transaction is expected to close by the end of 2010.

 

As a part of AIG’s effort to repay the bailout money, which it received in late 2008 when AIG had been at the edge of a collapse, the company continues to implement several restructuring initiatives. Consequently, as of Mar 31, 2010, the estimated TARP cost for AIG was down by $2.9 billion. The government is expected to exit its holdings in AIG in the near term. Also, AIG is in the process of disposing unnecessary businesses and plans to raise funds through earnings from business operations to repay the TARP loan.

 

Though the company stands to benefit from its scale of operations and the equity market recovery and is head-on with its restructuring initiatives, we remain concerned about its significant exposure to risky assets. Moreover, AIG’s assurance to make the full TARP repayment in 2011 presently casts a shadow of uncertainty.