And There's More .....

The FRBNY announced more sales on June 18th.

In addition, they announced (finally) that all the Maiden Lane loans (including ML I) had been fully repaid with interest.

It now seems likely that AIG will receive at least their $5 billion principal investment and $600 million interest by early july.

The current pace of sales, if it continues, will work through the remaining securities in a matter of weeks. 

My current guess is that AIG will have $7 billion in cash available for an early July purchase of Treasury shares. 

Additional Maiden Lane III Sales

On 5 June, 2012, the FRBNY announced that they were accepting bids for about $7 billion face value in CDO's.

Combined with the previous announced CDO sales, the cash from this offering should go a long way towards repaying AIG's $5 billion equity position in Maiden Lane III.

This is entirely consistent with my 26 May posting regarding sources of cash.

Below are the remaining holdings:

ILFC - The Basics

AIG has been reporting ILFC as if it were a stand alone entity in anticipation of an IPO.

Financial statements are available on its investor relations web page.

AIG has taken almost $3.5 billion in impairment charges over the last two years (roughly 10% of the book value of the fleet).

Selected Financial Data from 2011 10k:

General observations:

The revenue is reasonably stable.

AIG was too aggressive with respect to depreciation, leading to the impairment charges in 2010 and 2011.

AIG has reduced unsecured debt by almost 50% and total debt by roughly 20%.

There is no compelling reason for AIG to be in this business, and their decision to sell makes sense. The only issues are how soon and how much.

AIG - Sources of Cash

This is not particularly subtle or controversial. The only 'news' is that I am predicting that AIG will recover the principal from the ML III sooner than some may expect.  AIA is fairly certain regarding timing and amount -- the $7 billion based on current market prices.  ILFC is the least certain regarding both amount and timing. All the figures are intended to be conservative with respect to amount.

Strictly from these sources, AIG would be able to buy about a quarter of its shares at $29/share by September 4th of this year using only the $12.6 billion.

My personal guess is that AIG is more likely to buy at least half of the Treasury stake of 1.08 billion shares, with the rest sold in a public offering by early September. This would assume that the financial markets stabilize by then. Under more difficult financial conditions, this process will take longer.

Sources/Assumptions:

1. ML III - See earlier posts.
2. AIA - based on AIG ownership of 18.6%, Market Cap of 300 billion HKD, and an exchange rate of 7.76.
3. ILFC value selected based on book value (7,630,639 @ March 2012)
  @

Maiden Lane III - What's Left

The FRBNY releases a list of assets, including their face value, on a quarterly basis. The Marcy 31 listing is the current release. The list includes a very brief description, the CUSIP, and the face value of the security.

Assets currently include High Grade CDO's, Mezzanine CDO's, and a residual collection of debt securities where were primarily acquired as a result of the breakup of CDO's and subsequent distribution of assets.

At March 31:

CDO's                     $45,590
Misc                        $     817
Total                       $46,407

Subsequently, FRBNY has either sold or is offering for sale a significant number of CDO's.

Excluding those CDO's, at March 31 valuations, the face values were:

CDO's                     $33,584

Misc                        $     817

Total                       $34,401

The estimated fair value of these securities is $11,617. 

 

Without putting too fine a point on it, the larger CDO holdings contain a smattering of 2004 vintage as well as 2005 and 2006. 

It also seems reasonable that the FRBNY can continue selling CDO's and generate $5 to $6 billion in cash sales relatively quickly. this would allow AIG to recover its original stake of $5 billion plus accrued interest.  

With respect to providing AIG with cash to participate in Treasury sales of its stock, the timing of asset sales and distribution of proceeds may be more important that variances the ultimate cash sales of the portfolio. 

Maiden Lane III - 18 May 2012

Federal Reserve Balances show the Maiden Lane loan balance has dropped from $7,962 to $2,768, as it looks like the FRBNY received cash from the MAX CDO sales and applied it to the loan balance.

Bids for the sale of $1.7 billion face value Duke Funding CDO's has been delayed, pending distribution of more information by FRBNY.

However, bids for the sale of $691 million of Putnam CDO's are still due on Tuesday 22 May, 2012.

The Treasury announced the delay as follows:

May 18, 2012
The New York Fed decided to postpone its auction of ML III's holdings in the Duke CDO after it became aware that there was additional information concerning the Duke CDO that had not been made available to the bidders.  The New York Fed's auction of ML III's positions in the Putnum CDO is proceeding as announced on May 11.

If the net sales price on the roughly $4.9 billion of securities sales which have not yet been either announced (TRIAXX) or completed (Duke Funding, Putnam), is in the low 70% range, this should be enough to fully pay down the principal and accrued interest on the FRBNY loan:

As far as the assumption that the cash sales prices will be close to $3.5 billion, the TRIAXX CDO's were recorded at 31 December 2011 at a fair value of about 71% of face value. Given that the press releases have commented favorable on pricing, it does not seem unreasonable to assume that the final results will be around 70% or more. 

Payment of the Principal and Accrued Interest on the FRBNY loan will provide the basis for a nice headline when they are finally announced. 

Of note is that the estimated AIG recovery from Maiden Lane III or $7.6 billion is 16% of AIG's market cap @ $28/share (closing price on the NYSE, 18 May is $28.33). Although there is an argument for focusing on variances in results in the ongoing businesses, assets for sale, including stakes in AIA and the Aircraft Leasing business make up over 40% of AIG's current market value and are subject to material fluctuations which may be positive. 

  

Maiden Lane III - Two Weeks Later

The FRBNY is proving to be a diligent and determined seller of Maiden Lane III assets. Maiden Lane III will soon be able to pay back it's loan from the FRBNY in full. After it pays the principal and interest to the New York Fed, the next approximately $5.6 billion is cash from sales will flow directly to AIG.

At the pace of sales, this could happen closer to July 1, 2012 than the previously estimates discussed in the financial press of the end of the year.

This is important for AIG because Maiden Lane III assets are approximately 14% of AIG's market cap. These sales continue to support the view that their accounting has been conservative, that they are more liquid than thought, and there is potential for modest upward surprises like the current estimate of a $2 billion profit for AIG.

In addition, a full or partial payoff to AIG in the July timeframe could support the Treasury public offering of 400 million shares, with AIG taking 200 million in the next 60 days or so. Another dent in the 'overhang' and another simplification to a description of how the Treasury is making money on this deal and what needs to happen to wrap it up.

Since my prior post, consider the following activity:

1. FRBNY has announced a successful auction of TRIAXX CDO's. Results of the auction of the CDO's with a face value of $2.5 billion may net as much as $2 billion*.

2. FRBNY announced on 11 May, 2012 an auction of 2 CDO's (CUSIP 26441EAL5 and 25441EAA9), with a face value of $1.67 billion, with bids due on 17 May, 2012.

3. FRBNY announced on 11 May, 2012 an auction of 5 CDO's (CUSIP 746860AH9,  746860AK2, 746860AM8, 746860AP1, 746860AR7, and 746860BE5), with a face value of $0.69 billion, with bids due on 22 May, 2012.

The likely cash proceeds from these auctions combined with that of the MAX Commercial Real Estate CDO's is likely to be between $8.5 billion and $9.0 billion.

Maiden Lane III's pro forma balance sheet, assuming a payment of $8.5 billion:

So, the FRBNY principle will be paid off soon. Accrued interest is almost paid off. And future sales will flow directly to AIG until their $5.6 billion 

Maiden Lane owns over 100 CDO. A Partial listing including the largest 10 is shown below includes the usual suspects. Davis Square, Jupiter, etc. :

This includes mezzanine tranches as well as 'high grade' CDO.  They can get fair value by selling for less than 33 bp of face value. Given the current market conditions, I expect the FRBNY to just keep selling these unless the market backs up significantly. 

And, I don't expect any windfalls, although additional modest gains aren't unlikely. 

Sources:

1. Federal Reserve Balances, H.4.1 

2. Maiden Lane III balances

3. ML III Year End Report 2011.

4. Holdings Report, March 31, 2012.xls

* At year end 2011, the fair value of the TRIAXX was shown at 71% of face value and has presumably improved subsequently. 

Annals of AIG - Maiden Lane III

Current Status, April 30, 2012

On April 26, 2012, the FRBNY announced the sale of the MAX CDO holding from Maiden Lane III in a competitive bidding process.

The New York Fed announcement included everything BUT the sale proceeds, which will be announced as part of the quarterly report scheduled to be released on July 16, 2012.

However, enough information is known to have a reasonably good idea of what the CDO holdings sold for as well as the status of the Maiden Lane III transactions.

The biggest obstacle is to organize the information in one place. The New York Fed actually does a good job with this, but insist on withholding data in advance of their established reporting scheme.

Structure of the Special Purpose Vehicle:




At inception, AIG put up an equity interest of $5 billion, and the FRBNY loaned $24.3 billion to purchase $29.3 billion in CDO's  from AIG. $29.3 billion was the fair value at the time of purchase,

If the CDO's were simply held to maturity, then the loans and interest would be paid off based on the priority of claims (FRBNY senior, AIG junior), and any profits would be split 2/3 to the FRBNY, 1/3 to AIG.

MAX CDO valuation as of 12/31/2011

Commercial Real Estate CDOs : 


                                                                     Face Value                    Fair Value @ 12/2012


MAX 2007-1 A1                                         2,096,537                      1,162,320
MAX 2008-1 A1                                         5,403,463                      2,995,680
Total                                                             7,500,000                      4,158,000

Maiden Lane as of 4/25/2012

Current Status of Maiden Lane III LLC

If we assume that the FRBNY got $5 billion for the MAX Commercial Real Estate CDO's, and assume no change in the Fair Value estimate at April 25th, then:

1. The current outstanding Senior Loan Balance with Accrued Interest will be paid down from $8.701 billion to $3.781 billion.

2. ThePortfolio Holdings at fair value are reduced by $5 billion to $14.805 billion.

3. The coverage ratio of the FRBNY's loan approximately 4.

4. Assuming that the accrued interest owed AIG is $700 million, then the estimated profit is $5.4 billion, to be divided $3.6 billion to the FRBNY and $1.8 billion to AIG.

5. AIG will receive $7.5 billion, which includes their equity interest of $5 billion, $ .7 billion interest, and $1.8 billion profit.

If MAX CDO's sold for more than was assumed in the April 25th estimate, then AIG may split additional profits.

After the April 26th Sale:

The sale of the MAX Commercial Real Estate CDO's has substantially reduced the uncertainty regarding the likelihood of both the FRBNY and AIG fully recovering their contributions to ML III as well as accrued interest.

In addition, the successful sale sets the stage for future sales which may materially speed up the final resolution of ML III.

AIG has stated that they intend to use the proceeds of ML III to repurchase stock from the Treasury as it unwinds its equity interest in AIG. The earlier ML III is fully unwound, the sooner Treasury can divest its equity interest in AIG.

Financial Impact of ML III

AIG carries ML III at fair value. Per the AIG 10K (page 64),  ML III has had the following impact:

The cumulative change in fair value is about $2 billion. This is a significant portion of the favorable re-estimation of AIG's total proceeds from ML III.

At 12/2012, per the AIG 10K (page 47), the total shareholder equity was $104,951. ML III, booked at roughly $7 billion, is a significant component of shareholder equity, as well as any capital ratios using shareholder equity.

Conclusion

Almost all of the pieces of this transaction are publicly known.  However, the supporting documentation is scattered. The entirety of the published material lends a sense of the reduced risk remaining regarding ML III as well as the potential for favorable surprises regarding the timing of unwinding this entity.