AIG bondholders dodge break-up bullet

[NEW YORK] The announcement of American International Group's spin-off plans on Tuesday was seen as the better of two bad options for creditors happy to avoid a full break-up of the company.

Under pressure from activist investor Carl Icahn, who has advocated breaking up the company, AIG said it would spin off its mortgage insurance unit and sell its broker-dealer network.

It also announced it would return US$25b to shareholders over the next two years, far more than previously anticipated.

But the firm's avoidance of a complete break-up softens the impact on bondholders by decreasing the risk of ratings downgrades, said Rob Haines, senior analyst at CreditSights.

"What we are left with is a small increase in leverage and a more aggressive capital return plan," he said. "But weighed against the potential for downgrade this is modestly favourable."

The better outcome for creditors was reflected in AIG's bond curve which closed flat to 2bp tighter on the day, according an investor.

Fitch on Tuesday affirmed AIG's senior debt rating at BBB+ and issuer default rating at A-, revising its outlook to stable from positive.

It cited AIG's recent announcement of a US$3.6b charge for loss reserves in Q4 2015, as well as the newly announced capital return plans.

Mr Icahn has argued that a break-up would help the company escape designation as a systemically important financial institution (SIFI).

However, the planned spin-offs are unlikely to achieve that, another positive point for bondholders, said Mr Haines.

"(SIFI designation) layers in another regulatory group that will be supervising the company," he said. "That provides a greater degree of comfort with regards to the potential for more significant plans to forward money to shareholders. And it might preclude AIG from undertaking any large transformational M&A deals."

REUTERS