On Sunday, the Wall Street Journal reported that American International Group Inc. (AIG) anticipates more counter-offers for the purchase of its $15.7 billion outstanding residential mortgage-backed securities (RMBS) on Maiden II, which is a special-purpose investment vehicle that the company had used during the peak of its financial crisis.
Earlier this month, AIG had offered to repurchase about 800 RMBS for about 50 cents on the dollar. The company is expected to use the cash generated by its insurance operations in order to buy back the RMBS. When AIG was formed in December 2008, it had about $20.5 billion of RMBS under Maiden II, which has now declined to $15.9 billion.
However, AIG has taken into cognizance that about four banks have studied the portfolio of assets of Maiden II. The Financial Times reported that Barclays plc (BCS) could be one of them. AIG believes that the buyback of the RMBS could help the US government earn about $1.5 billion from the company’s bailout loan.
The repayment of the Maiden II loan will further reduce AIG’s loan obligations toward the US government to about $26 billion from about $39 billion at 2010 end, and the initial debt chunk of about $182 billion in 2008. This appears to be quite an impressive progress.
The government’s $26 billion comprises preferred interests in AIA Group worth $11.3 billion held by the Treasury, a different Maiden Lane III vehicle that holds interests in collateralized debt obligations, and an undrawn line of credit.
As for AIG, the value of RMBS has improved with the current economic revival and hence, the buy back at this point would prove to be a lucrative investment. Besides, the debt repayment can help ease the process of public offering of the 92% stake of Treasury in AIG, which is expected by May this year.
AIG’s ongoing capital restructuring process over the past several quarters has started yielding positive results. While asset disposals and repayment of a chunk of debt provide heightened operating efficiency, the execution of the recapitalization program also appears favorable for the book value growth. We expect the company to benefit from its scale of operations with the recovery of the economy in 2011 and beyond.
Meanwhile, most of AIG’s core businesses are also showing up given the unique operational focus and management discipline. While SunAmerica helped in the modest growth of assets under management during the fourth quarter of 2010, losses at ILFC are waning and aiding in the expansion of its aircraft portfolio.
Besides, with an appreciation in the equity market, stable debt ratings and a gradual recovery in the economy in the upcoming quarters, we expect AIG to regain the value of its investments. This has also helped the company dispose its redundant and risky businesses at attractive valuations.
AMER INTL GRP (AIG): Free Stock Analysis Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
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