AIG Begins $1.5 Billion Tender as CFO Herzog Reduces Debt

Jun 12, 2014 10:50 am ET

(Updates with bond trading in the fifth paragraph, analyst’s comment in the ninth.)

June 12 (Bloomberg) -- American International Group Inc., the largest property-casualty insurer in the U.S. and Canada, announced a tender offer for as much as $1.5 billion of its bonds as Chief Financial Officer David Herzog seeks to cut debt.

The offer expires on July 10, New York-based AIG said today in a statement. It covers securities issued in dollars, pounds and euros, some with coupons of more than 8 percent.

AIG has been reducing debt to improve its standing with credit-rating firms and regulators as the company prepares for increased oversight from the Federal Reserve after its designation as a systemically important financial institution. About 40 percent of the insurer’s debt is from 2007 and 2008 when the global credit crisis and the company’s near collapse forced borrowing costs higher, Herzog said at a conference last month.

“Some of that is pretty expensive,” he said May 20 at an investor presentation. “It provides an opportunity for us to think opportunistically about how to manage the cost of our debt capital to a more sensible level.”

AIG’s $3.6 billion of 8.175 percent, junior subordinated notes due 2058, which are included in the tender offer, gained 2.5 cents to 137.75 cents on the dollar for a yield of 5.36 percent at 10:45 a.m. in New York, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. That’s the highest price since the bonds were issued in 2009.

Perceptions of the insurer’s creditworthiness also benefited from the cash-and-stock sale in May of International Lease Finance Corp. to AerCap Holdings NV, Herzog said. AIG received $3 billion of cash and got rid of $26 billion of liabilities in the deal, he said.

Coverage Ratio

AIG had the top Aaa credit rating at Moody’s Investors Service as recently as 2005. The insurer has had a Baa1 grade, the eighth highest of 10 investment-grade levels, since 2011.

The insurer said this week that Peter Hancock, the head of the property-casualty unit, will take over as chief executive officer Sept. 1, replacing Robert Benmosche. Deploying capital while under Fed oversight will be among Hancock’s challenges, Jay Gelb, an analyst at Barclays Plc, said in a note to investors June 10.

“The company would like to improve its interest coverage ratio, a critical metric for the rating agencies,” and has opportunities to redeem and refinance debt, Gelb wrote.