AIG raises $6 billion from AIA share sale

The deal attracts more than $9 billion of demand, but prices at the maximum 7% discount.

American International Group (AIG) early this morning raised HK$46.7 billion ($6 billion) from the sale of close to half its remaining stake in pan-Asian life insurer AIA through a block trade that was priced at the maximum 7% discount. The deal came as AIA has gained 20% so far this year and after the stock closed level with its record high of HK$29.55 on Tuesday last week.

Even so, the offering attracted a lot of interest both from existing shareholders seeking to increase their exposure and new long-only guys, and according to a source the total demand reached about $9 billion. Other sources said some orders were as large as a quarter-of-a-billion dollars. In many ways the response mirrored the high-quality demand for AIA’s Hong Kong IPO in October 2010.

To ensure a successful transaction and to ensure good momentum from the start, Deutsche Bank and Goldman Sachs teamed up to wall-cross a selective number of investors on Sunday and when the order books opened at 9.30am yesterday (AIA’s Hong Kong-listed stock was suspended all day), the deal was already half covered.

By about 3.30pm Hong Kong time, the banks were able to go out with a message that the deal was fully subscribed. However, the books were kept open until 3am Hong Kong time this morning to allow investors in Europe and the US sufficient time to take a look at the transaction and weigh it against AIA’s 2011 earnings that were released on February 24.

The shares were offered at a decent discount of 5.8% to 7.0% versus Friday’s closing price of HK$29.20, which seemed to acknowledge not only the strong gain in the past couple of months, but also the fact that this is by far the largest ECM transaction in Asia this year. In fact it is three times the size of Citi’s exit from India’s Housing Development Finance Corp a week-and-a-half ago, which priced at a 6.25% discount.

AIG offered 1.72 billion shares, which accounts for 14.3% of AIA’s outstanding share capital and 43% of the US insurance company’s remaining stake. The block also represents about 58 days of trading volume based on the average daily turnover in the past month.

The absolute placement price ranged from HK$27.15 to HK$27.50 and was fixed at the bottom for the maximum discount.

The source said more than 250 investors participated in the deal. As is usually the case for Asian offerings, the majority of the demand came from Asia, but there was also very strong interest from the US and quite good demand from Europe. As one observer noted, if you are a US-based fund looking for Asian exposure then AIA is a good bet, given that it operates in 15 markets across the region. Few other companies will provide a similar reach across the region. Many US funds are also familiar with AIA through it US parent company.

The sale had been expected as AIG still needs to raise more cash to repay the rest of the $182.3 billion bailout that it received from the US government to stay afloat in September 2008, shortly after Lehman Brothers went bankrupt. AIG repaid part of this in 2011, including $18.5 billion of preferred interest, by selling a variety of assets. Among other things, it sold its Taiwan unit, Nan Shan Life Insurance, for $2.16 billion last year and in 2010 it sold its American Life Insurance unit to MetLife for about $16 billion.

The US government has also converted some of its preferred shares into common shares and following a secondary share sale in May last year in which it sold 200 million AIG shares, the government holds a 77% stake in AIG.

During its 2011 earnings presentation last month, AIG noted that it needs to pay an additional $8.4 billion of preferred interest to the government and implied that it could use its AIA shares as a funding source. A presentation to investors described its AIA stake as a “non-core asset”.

The $20.5 billion IPO of AIA reduced AIG’s stake in the company to 32.9% from 100% and the US company has been free to sell half of that stake since October 29 last year when its initial 12-month lock-up expired. However, at the time, the share price was only slightly above the IPO price of HK$19.68 — it hit a record low of HK$19.94 on October 4 — and the global market environment was also highly volatile and unpredictable. By keeping its cool and waiting four months, AIG will be able to raise significantly more money for the same number of shares than it would have been able to in early November.

Following yesterday’s sale, AIG’s stake in AIA will fall to 18.6% and all of that will be locked-up for another 180 days. This new arrangement will replace the previous lockup for 50% of AIG’s shares that was due to expire on April 18. At the placement price, AIG’s remaining 2.26 billion shares are valued at approximately $7.9 billion.

As noted, the deal was led by Deutsche Bank and Goldman Sachs, who were joint global coordinators and joint bookrunners and the only two banks that were actually taking orders from investors. However, seven other banks were also on the ticket, reflecting their relationship with AIG. Citi and Morgan Stanley were joint global coordinators, while Bank of America Merrill Lynch, Barclays Capital, Credit Suisse, J.P. Morgan and UBS were joint bookrunners.

This was the same line-up as during AIA’s IPO, with the exception for CIMB and ICBC International, which were not included as bookrunners yesterday. During the IPO all four global coordinators were also more actively involved.

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