The Federal Reserve Bank of New York (“Fed”) recently announced the sale of American International Group’s (AIG) remaining $1.9 billion bad assets to Merrill Lynch Pierce Fenner & Smith Incorporated, a unit of Bank of America Corporation (BAC), according to Financial Times.
The bad assets are the toxic mortgage securities (called Maiden Lane III LLC) that the Fed assumed in 2008 to rescue the insurance giant. Although the terms of the deal remain undisclosed, the sale of these mortgage securities are said to have occurred at a discounted price from its face value.
The unpaid loan amount is unclear as sale of assets have not taken place at the face value of the assets. However, Financial Times revealed that the unpaid loan amount accrued an interest of $3.5 billion as on June 6.
Last month, Fed had postponed the sale of these assets. Perhaps, this step was taken for the need of greater transparency by other brokers and dealers in the sale process. However, there was no official affirmation on the same.
Maiden Lane III was created in 2008 to rescue the company from a financial downturn by furnishing it with $24.3 billion in cash. The portfolio of assets comprising collateralized debt obligations (CDOs) to terminate the credit default swaps (CDS) are the last of the assets that still remain unpaid under the loan issued by the government.
Under the financial rescue program, the Treasury Department provided a lifeline of $68 billion along with $144 billion from Fed. AIG could repay only $17.5 billion of the loan until January 14, 2011 when Fed decided to terminate the financial assistance and sell the assets in order to repay the company’s obligations to the American public. The US Treasury continues to have an investment worth $30 billion approximately AIG’s shares.
With the sale of these assets AIG will complete the repayment of Fed’s loan. According to the Federal Reserve, it will have to repay $5.6 billion, two-third of which will be shared by Fed.
Unburdened from most of its debt obligations, AIG can now breathe a sigh of relief. It can now focus more on its core business and work towards improving its earnings. Also, now it will be able to utilize its earnings to boost shareholders value by initiating a share repurchase program.
The company is also settling various litigations filed against it. Most recent being a payment made to the supervisory body of Pennsylvania worth $16.8 million and another payment of one million made to settle a workers compensation insurance complaint in Mississippi.
Following the favorable events in the company which include the lowering of its leverage coupled with the settlement of lawsuits, its stock price has been on an increasing trend. Its shares traded at $30.30 (as on June 13, 2012) exhibiting an increase of 11 cents per share over the previous day’s closing price and also a 2.6% increase over Monday, June 11, 2012.
Following the recent favorable movements, the Zacks Consensus Estimates improved by 0.81% to $3.74 per share over the last 30-days for the year 2012. AIG currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We also maintain our long-term Neutral recommendation on its shares.
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