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AIG to Redeem $1.1 Billion of Debt in Path to Dividend

American International Group Inc. (AIG) said it will redeem $1.1 billion of debentures as the company seeks to lower debt before reinstating a dividend.

The junior subordinated securities pay a 7.7 percent coupon and are due in 2047, the New York-based firm said yesterday in a statement.

“The redemption reduces expensive debt, improves our interest coverage ratios, and puts us in a position to remain opportunistic with respect to liability management going forward,” Chief Executive Officer Robert Benmosche, 68, said in the statement.

Benmosche, who repaid a U.S. bailout in December, has said AIG may reinstate a dividend this year after suspending payments in 2008. The insurer first needs to lower debt, said the CEO, who began an offer Feb. 19 for as much as $1.25 billion of securities with rates as high as 8.625 percent.

The insurer is working to improve its standing with credit ratings firms and regulators after repaying the bailout in December. A priority is to cut interest expenses relative to cash flow, Benmosche said in a Feb. 22 conference call.

“As the year progresses, we will then begin to look at things like ‘Could we add a dividend to the stock and also could we have some kind of modest stock buyback?’” he said on the call. “But we’re going to wait until we’re very, very sure we’re in great shape.”

Share Rally

AIG gained 1.1 percent to $39.43 at 9:44 a.m. in New York. The company rallied 39 percent in the past 12 months, compared with the 13 percent gain in the Standard & Poor’s 500 Index.

The insurer was bailed out in 2008 after credit downgrades increased liabilities on contracts backing investors against losses on mortgage-related securities. The company, led by Benmosche since 2009, has the eighth-highest of 10 investment- grade bond ratings at Moody’s Investors Service.

“AIG is focused on reducing financial debt to satisfy the ratings agencies,” Jay Gelb, an analyst at Barclays Plc, wrote in a Feb. 22 research note.

Total debt outstanding was about $46.7 billion as of Dec. 31, according to an AIG regulatory filing. That figure excludes more than $20 billion at the plane-leasing unit that Benmosche agreed to sell to a Chinese investor group. Total debt was more than $100 billion at the end of 2010.

The insurer struck deals to sell more than $70 billion in assets as it worked to end the bailout and simplify the company.

AIG’s ability to pay a dividend may depend on a Federal Reserve review of the insurer’s capital, Benmosche said in a conference call on Nov. 2. The company in October was the first non-bank to disclose it was under consideration to be labeled a potential risk to the financial system, a designation that carries additional Fed oversight.

“I would love to be able to put a dividend on the stock,” Benmosche said Feb. 22. “It increases the number of potential shareholders for this company.”

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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