Fortress Takeover of AIG Lender Costs Bondholders $792 Million
American General Finance Inc. debt has lost at least $792 million since Fortress Investment Group LLC agreed to buy the lender last week, punishing bondholders from Loomis Sayles & Co. to Pacific Investment Management Co.
Fortress’s purchase is sparking concern that the buyout and hedge-fund firm will seek to swap or repurchase bonds at discounted prices to trim $17 billion of American General’s debt, according to analysts and investors. That’s reversing a June rally fueled by expectations that parent American International Group Inc. would sell the unit to a bank with top credit ratings.
“The loss of a traditional investment-grade buyer is key to the selloff,” said James Palmisciano, chief investment officer at New York-based Gracie Credit Opportunities Fund LP, who said he’s been avoiding the debt. Fortress “management is smart, savvy and opportunistic, and will probably only repurchase debt when it makes sense -- at larger discounts than here.”
American General’s bonds declined last week by the most since September 2008, when the U.S. government rescued AIG amid mounting losses on securities linked to subprime-mortgage debt. While the New York-based insurer is reducing lending to borrowers with the lowest credit scores, Fortress Chief Executive Officer Daniel Mudd, the former head of Fannie Mae, is seeking to gain from a potential rebound in consumer lending.
American General’s $3 billion of 6.9 percent notes due in 2017, the Evansville, Indiana-based company’s largest debt offering, declined over three days to 78 cents on the dollar from 90 cents on Aug. 10, the day before the deal was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Loomis, based in Boston, was the largest owner of the bonds as of June 30 among investors that publicly report their holdings, according to data compiled by Bloomberg. Newport Beach, California-based Pimco, manager of the world’s biggest bond fund, and BlackRock Inc. in New York also are among top holders.
American General’s $750 million of 5.4 percent notes due 2015 fell 13 cents from Aug. 10 to 75 cents on the dollar, Trace data show.
Debt prices are “signaling that bondholders believe Fortress will try and do a debt restructuring,” said Kathleen Shanley, an analyst at Gimme Credit LLC in Chicago. “It’s also a lack of information from the company and so they’re drawing the conclusion that the outcome won’t be favorable to bondholders.”
Fortress spokesman Gordon Runte declined to comment. AIG spokesman Joe Norton, Loomis spokeswoman Meg Clough, Pimco spokesman Steven Vames and Melissa Garville, a spokeswoman for BlackRock, didn’t provide comment.
American General, which has assets of $20 billion, cut 1,400 jobs and closed 196 branch offices last year, the unit said in a March filing.
The business, founded in 1920 and acquired by AIG in 2001, provides loans ranging from home-improvement to unexpected expenses and vacations. It’s posted operating losses of $723 million in 2008, $868 million in 2009 and $143 million in the first six months of 2010, according to a regulatory filing.
“We believe that AGF is well-positioned for significant growth in an underserved market,” Wesley Edens, co-chairman and founder of New York-based Fortress said in an Aug. 11 statement.
Fortress doesn’t have the high-credit rating necessary to revive American General’s business of originating subprime loans, said Adam Steer, an analyst at CreditSights Inc. in New York, in a telephone interview. Previously, the lender borrowed cheaply by relying on AIG’s investment-grade ranking from Moody’s Investors Service and Standard & Poor’s.
American General is ranked B3 by Moody’s, six levels below investment grade, and B by S&P, one grade higher.
“Without a funding model, there are questions over the viability of the business,” Steer said. “It’s a profitable business if you can underwrite and fund it. However, there is uncertainty as to how you fund it.”
Fortress will pay about $130 million for an 80 percent stake in the lender, said three people with knowledge of the transaction.
AIG, which opted to retain a 20 percent stake, will book a pretax loss of about $1.9 billion on the deal, according to a filing from the insurer, which previously valued the unit at about $2.4 billion. The Fortress transaction may be completed by the end of March.
“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 after the transaction was announced.
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.
The cost to protect against an American General default in the credit-default swaps market soared more than 60 percent last week.
Five-year credit-default swaps on American General jumped 348 basis points to 896 basis points, meaning the annual cost to protect $10 million of American General bonds jumped $348,000 to $896,000.
The difference between the American General contracts and those linked to AIG debt widened to the most since June 2009, according to data provider CMA. The gap between swaps on American General and AIG widened 340 basis points to 604 basis points, CMA data 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 equals $1,000 annually on a contract protecting $10 million of debt.