Saturday, October 10, 2009

The AIG Trifecta Part III – American General Finance

Now, the last part to the seemingly endless AIG trifecta, brought to you by this blog, chock full of ideas that may or may not make you money. (Now you know why I never went into sales).

American General Finance. I wonder, who came up with that catchy name? In any case, its subsidiary of AIG and it also has bonds out in the markets with double digit yields on them.

Should you buy?

First of all, understand that AGF is a consumer loan company. They will give people loans to buy a refrigerator or send their kid to college or (drumroll) to buy a house. The get their money from the same “wholesale” model that we discussed here with CIT and ILFC. For those who haven’t been reading, that means they issued commercial paper and mid-term bonds to the market. They would then lend that money to individuals (as opposed to businesses for CIT and ILFC).

I’ll link to the 10-Q, but here are the basic numbers: a loan portfolio of about $20.7 billion, of which (yikes) $15.5 billion are real estate loans. On the other side about $20.9 billion of long and short term debt.

AGF has the same problem that CIT faces: they don’t have access to capital markets right now to roll over debt as it matures. They also have the additional problem that their real estate portfolio -well- is not great. About a third is “sub-prime” (FICO less than 619), another 20% is “non-prime” (FIC0 between 619 and 660) and the rest is “prime” as defined by these guys (FICO over 660). (Nowadays, TRY getting a loan with a 660 FICO score…)

Delinquency rates are up and the average yield on the portfolio (about 10%) is high, but can’t support higher funding costs.

Trying to not get too numeric, there is a real problem here.

Fortunately for AGF, there are some things they can do. First, liquidity. They are in “collection” mode, as in collecting more than they lend out, so they are generating some cash. They are cutting costs by closing branches, etc. Plus, consumer loans and mortgages, as maligned as they may be are still “pseudo commodities” and they can be packaged and sold or securitized and used as collateral for lower cost loans (and AGF has done so). As long as AGF can collect and sell assets, they can service debt as it matures (until they run out, but that could take a while).

Second there is support. This year, AIG came up with over $750 million in fresh equity for AGF. That’s money AGF does not have to pay back (unlike the money AIG lent to ILFC). A “bailout”, if you will. AGF could need more in the future. How much? I’d say about $2 billion tops.
Additionally, AGF has “lent” its parent AIG over $1.5 billion at low (Libor plus 50 bp) rates, but at an interest rate nonetheless.

The idea is not to dwell on these transactions between parent and subsidiary, but to understand that as AIG and AGF become more intertwined, they also become less separable. AIG has only formally committed to supporting AGF until Aug 15, 2010. But how do they cut loose, once they have intermingled the finances of parent and subsidiary? It’s not that simple.

So the credit holder in AGF is basically watching a game of chicken with the government “supporting” AIG (can they really cut loose?) and AIG supporting AGF. Methinks that if all it takes is another $2 billion of equity infusion in AGF, AIG (and the government) will prefer to pay it than deal with the public opinion consequences of an AGF failure.
And frankly, who is going to know? Like anyone noticed when AIG put $750 million into AGF to shore it up this year. Two billion is a drop in the bucket in the whole AIG mess.

So there you have it, your “bailout” opportunity number three. AGF bonds are available in a number of flavors. Here are a few options:

I’m not particularly partial to this particular AIG flavor (AGF), but if you understand the risks, well that’s what its all about. Potential double-digit returns do not come without some risks these days, even if a government bailout is involved.

Psst. If you ask me, I’d get the short dated paper (May 2010), at least AIG has committed to support through that date.

And so ends the AIG trifecta. Yes, there is still more to AIG, like AIGFP, which was an integral part of the financial meltdown mainly due to the CDS it wrote on CDOs, like RMBS and CMBS, leading to TARP, TALF and many, many more acronyms.
But no.

1 comment:

  1. It's always nice when you can not only be informed, but also entertained! I'm sure you had fun writing this article...