AIG bond offer fails to reassure investors

New York: Three years after being rescued by US taxpayers, American International Group's (AIG) $2 billion (Dh7.34 billion) bond offering shows that debt investors are still wary about the insurer's prospects as it seeks to end government ownership.

AIG sold $1.2 billion of 4.25 per cent, three-year notes last week and $800 million of 4.875 per cent, five-year debt. Relative yields paid by the New York-based company, which Moody's Investors Service assigns an investment grade of Baa1 and Standard & Poor's says is worthy of an A-, were about 2 percentage points higher than those charged its similarly rated peers.

Investors demanded premium yields in AIG's second offering since September 2008, when a government rescue that eventually swelled to $182.3 billion saved the company from collapse after Lehman Brothers Holdings' bankruptcy. Proceeds from the bond sale will help repay $4.1 billion of debt due in the next year that was used to invest in fixed-income securities including mortgage bonds, AIG said in a regulatory filing.

"AIG is aptly regarded as a higher-volatility name in an already volatile sector, in part because of the lingering stigma of the government bailout," Steve Schneider, a Des Moines, Iowa-based analyst at Principal Global Investors, said. Principal Global has $235 billion in assets under management.

Yield spreads

AIG's three-year notes were priced to yield 4.125 percentage points more than Treasuries, while the five-year securities had a spread of 4.25 percentage points, according to data compiled by Bloomberg. Insurance-company bonds due in three years and rated in the BBB tier pay an average 233 basis-point spread, or 2.33 percentage points, Bloomberg data show. Spreads on five-year securities from insurers with a similar rating were 239 basis points.

Investors are pricing AIG's debt "at more of a high double-B," than the company's actual Baa1 rating, said James Leonard, a credit analyst at Morningstar. "The market thinks this is maybe a triple-B or triple-B minus company, but still wants to punish it a little bit more than that."

In its last bond offering on November 30, AIG sold $500 million of three-year, 3.65 per cent notes and $1.5 billion of 6.4 per cent, 10-year notes, Bloomberg data show. That sale was the company's first since Aug-ust 2008.

AIG bonds have gained 0.01 per cent this month after plunging 4.79 per cent in August, the worst performance among the top 50 issuers in the Bank of America Merrill Lynch US Corporate Master index.

"It's highly desirable for them to be able to continue to demonstrate access to capital markets," Schneider said of AIG. "The ratings agencies will view that very positively, as will investors."

AIG's newest bonds will help the company refinance borrowings due under its "Matched Investment Program."