American General Bonds Tumble Most Since October 2008

American General Finance Inc. bonds declined the most in almost two years on speculation that Fortress Investment Group LLC may try to restructure its debt.

American General’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. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the largest one-day decline since the bonds fell 10 cents on Oct. 17, 2008, Trace data show.

Fortress, the buyout and hedge-fund firm that said today it bought a majority stake in the consumer lender from American International Group Inc., may seek to reduce the company’s $17.3 billion debt burden through a bond swap, according to investors and analysts. American General has posted about $1.7 billion in operating losses since 2008.

“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, managing director of corporate credit at New York-based Brookfield Investment Management Inc., with $24 billion in assets under management.

Fortress will take an 80 percent stake in American General with New York-based AIG retaining the rest, according to a statement today that didn’t disclose terms.

“New ownership may potentially seek to engage in some type of business reorganization, up to and including a restructuring of the firm’s capital structure,” Fitch Ratings analysts Mark Rouck and Julie Burke in Chicago said in a statement today.

Reported Losses

The bond-ranking firm placed American General on rating watch negative. Fitch grades the company B-, six steps below investment quality, according to Bloomberg data.

Joe Norton, an AIG spokesman, declined to comment. Gordon Runte, a spokesman for New York-based Fortress, didn’t immediately return a call.

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.

Investors may have been hoping AIG would sell the unit to a bank or insurance company that would guarantee or support American General’s debt, rather than a firm that may try to force bondholders to reduce the value of their investment, said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which has $61 billion in assets under management.

“You’d certainly rather have the franchise bought by a strategic buyer rather than a financial buyer,” Brady said in a telephone interview. “It’s just not an ideal scenario” for bondholders.

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