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AIG Credit-Default Swaps Touch Pre-Crisis Low After U.S. Accord

The cost to protect American International Group Inc.’s debt fell to the lowest since July 2008 after the insurer agreed with U.S. regulators to repay its bailout by converting the government’s stake into common shares.

Credit-default swaps on AIG dropped 13.5 basis points to a mid-price of 242.9 in New York, according to data-provider CMA. Earlier, the contracts fell as low as 230, according to broker Phoenix Partners Group, losing 374 basis points since May 25 and 3,453 basis points from their record in May 2009. They last closed below 240 on July 25, 2008.

“AIG appears to be an incredible story of redemption,” said David Havens, an analyst at Nomura Holdings Inc. in New York. “The overall sentiment toward AIG has obviously improved dramatically over the past year, and AIG seems to be falling back into the realm of normalcy.”

The company, once the world’s largest insurer, turned over a majority stake to the government in exchange for a rescue that swelled to $182 billion. Federal Reserve Chairman Ben S. Bernanke has said the bailout, a day after the September 2008 failure of Lehman Brothers Holdings Inc., made him “more angry” than any other episode in the financial crisis.

The U.S. Treasury will convert its preferred stake of about $49.1 billion into 1.66 billion shares of common stock and then sell the holdings in the open market, AIG said today in a statement. Common shareholders, who hold about 20 percent of the company, will have their stake diluted to about 7.9 percent, the insurer said.

AIG Bond Sale

The step toward independence for AIG, whose near collapse two years ago threatened the global economy, follows Chairman Steve Miller’s announcement yesterday that the company will sell bonds for the first time since the bailout.

“The news is a credit positive for the company, though there is no assurance the company will maintain a single-A rating ex-government support,” CreditSights Inc. analysts including Robert Haines wrote in a note to clients. “There are still many hurdles before the company’s restructuring is complete. We believe it is difficult to envision another major catalyst for significant spread tightening from here aside from some modest positive momentum following today’s announcements.”

AIG’s 30-year, 6.25 percent bonds issued March 6, 2007, increased 3.56 cents to 86.06 on the dollar to yield 7.47 percent, or 378 basis points more than similar-maturity Treasuries, according to Trace, the bond-pricing reporting system of the Financial Industry Regulatory Authority.

The swaps may be nearing fair value as they approach levels similar to those of their peers, according to Havens.

Other Insurers

“It’s hard to make the case at least in the CDS that spreads are too wide at this point, because you’re really not all that far away from where a lot of the other insurance companies are,” Havens said.

Contracts on MetLife Inc. fell 7 basis points to 222 and those on Hartford Financial Services Group Inc., an insurer whose investment losses in 2008 led to a U.S. bailout, eased 6.9 basis points to 238.5, according to data provider CMA.

Credit-default swaps on the Markit CDX North America Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell for a third day, losing 0.9 basis point to a mid-price of 106.8 basis points, according to index administrator Markit Group Ltd. The index, which typically falls as investor confidence improves, is trading near its lowest level since rolling to a new series on Sept. 20.

Business Activity

Business activity unexpectedly accelerated in September, with the Institute for Supply Management-Chicago’s business index climbing to 60.4, more than the highest estimate of economists surveyed by Bloomberg News, a sign manufacturers are at the forefront of the recovery.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 0.9 basis point to 111.5, and the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield ratings added 3 basis points to 512, Markit prices show.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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