Aug. 12 (Bloomberg) -- American International Group Inc. agreed to sell its consumer lender for less than 1 percent of the unit’s $20 billion in assets to avoid the possibility that the business would sap U.S. bailout funds, said three people with knowledge of the transaction.
Fortress Investment Group LLC will pay about $130 million for an 80 percent stake of American General Finance Inc., said the people, who declined to be identified because deal terms aren’t public. Divesting the lender and its $17 billion in debt removes the risk that the U.S. would have to pump more funds to maintain the parent’s credit rating, said two of the people.
“There was an increasing need to find a resolution to the funding side of that business,” said Jonathan Hatcher, a Jefferies Group Inc. analyst in New York and a former Federal Deposit Insurance Corp. bank examiner. “They get to deconsolidate quite a bit of debt off their books, and this is better than continuing to sink more money into it.”
The U.S. government, majority owner of AIG after rescuing the insurer in 2008, is working on a plan to exit its stake in the company while leaving the firm with an A credit rating or better to attract customers and investors. Chief Executive Officer Robert Benmosche, 66, has said AIG will focus on global property-casualty coverage and U.S. life insurance and retirement products.
AIG and its advisers at Bank of America Corp. started seeking a buyer for American General after the bank led a $3 billion refinancing of the unit’s debt in April, said a person with knowledge of the matter. That transaction helped buy the unit enough relief from debt maturities to get potential bidders interested in the business, the person said.
Kept a Stake
AIG opted to retain a 20 percent stake in order to reap some of the gains if American General’s business recovers, said the person.
AIG will book a pretax loss of about $1.9 billion on the deal, according to a filing yesterday from the New York-based insurer, which previously valued the unit at about $2.4 billion. The Fortress deal may be completed by the end of March, the firms said.
Joe Norton, a spokesman for AIG, and Gordon Runte of Fortress declined to comment.
American General lends cash for mortgages, personal loans, home equity lines and retailers’ clients and has more than 1 million customers. The business was founded in Evansville, Indiana, in 1920 and acquired by AIG in 2001.
The lending unit lost access to financing sources including commercial paper and unsecured debt after AIG was downgraded amid losses that led to the 2008 rescue. AIG said this year it intended to support the subsidiary through February 2011.
American General cut 1,400 jobs and closed 196 branch offices last year, the unit said in a March filing. The business posted operating losses of $723 million in 2008, $868 million in 2009 and $143 million in the first six months of 2010.
American General bonds declined the most in almost two years on speculation that Fortress may try to restructure its debt. The unit’s $3 billion of 6.9 percent notes due in 2017 dropped 6.5 cents to 83.5 cents on the dollar as of 3:12 p.m. yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“What you have is a balance sheet that is not capable of standing alone, and a new owner that may look to do something about that via an exchange,” said Joel Levington, a managing director at New York-based Brookfield Investment Management Inc., with $24 billion in assets under management.
The unit’s debt may be downgraded by Fitch on the prospect that “new ownership and existing management may potentially seek to engage in some type of business reorganization, up to and including a restructuring of the firm’s capital structure,” the bond-rating firm said yesterday in a statement.
The unit could have been put through bankruptcy, the oversight panel said in the June report. The approach would “avoid indirectly subsidizing money-losing subsidiaries and their creditors,” according to the report.
AIG has been booking losses on deals to divest units including Nan Shan Life Insurance Co. and American Life Insurance Co., which sell policies outside the U.S. AIG posted a second-quarter net loss last week after taking a $3.3 billion accounting charge tied to Alico. The charge tied to American General will be incurred in this year’s third quarter, the company said.
AIG is represented by Weil Gotshal & Manges LLP on the transaction, and Fortress is being advised by Skadden Arps Slate Meagher & Flom LLP.
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