AIG (AIG) paid a premium on its return to the credit markets with its first bond sale since its rescue by the government two years ago.
The insurer sold $2 billion of bonds with a $1.5 billion tranche priced at a spread, or risk premium, of 362.5 basis points over U.S. Treasuries.
The bond sale comes after AIG's $180 billion bailout at the height of the financial crisis and after the company this year unveiled a plan to reclaim its independence.
The insurer has raised considerable cash through the sale of businesses and other assets.In the third quarter, the company had a net loss of $2.4 billion after recording more than $3billion in writedowns on assets that are being sold to repay U.S. bailout funds.Bond investors said the deal was well-received, but that AIG offered yields that were much higher than those of similarly rated insurers."It is definitely cheap for the rating, but the rating implies a certain level of government support," said Derrick Wulf, head of interest rates at Dwight Asset Management. "Without the government support, some would put it as below investment grade."AIG is rated single A minus by Standard & Poor's and A3 by Moody's Investors Service. S&P says that its credit rating on AIG includes a five-notch uplift from its assessment of the company's standalone credit profile, which is junk-rated double B. Bonds due in 2020 issued by Prudential Financial (PRU)trade at a spread of 180 basis points over Treasuries, while debt due in 2019 issued by Allstate (ALL) trades at a risk premium of 135 basis points over Treasuries, according to investors. Prudential is rated single A and Baa2 while Allstate is rated single A minus and A3."There are still a lot of moving parts, not the least of which is big government ownership," said Lon Erickson, managing director at Thornburg Investment Management. "For a lot of different reasons, they are paying a nice premium."Robert Benmosche, AIG's chief executive, said in November that the company planned to sell stock as well as bonds. At the end of September, the federal government owned $95.6 billion of AIG debt and equity. Since then, AIG has raised $37 billion in asset sales.The yields appeared to be enough to compensate investors for lingering concerns about AIG's future and the stigma of its dramatic collapse. A person familiar with the deal said that orders totaled $8 billion and that the bonds were priced at risk premiums that were less than that which the company initially offered."Despite the formal rating, we view the risk profile as more high-yield, which is how this deal is being priced," said Sabur Moini, portfolio manager for the Payden High Income Fund.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV