North America Equity Issue

IFR Review of the Year 2012
4 min read
Anthony Hughes

Cleaning up: The sale of US$20.7bn worth of American International Group stock by the US Treasury Department in September was the largest common stock follow-on in US history and the highest profile equity deal of the year. For returning money to taxpayers and restoring the insurer’s institutional shareholder base, the offering is IFR’s North America Equity Issue of the Year.

To see the full digital edition of the IFR Review of the Year, please <a href="" onclick=";return false;" onkeypress=";return false;">click here</a>.

The fifth and largest selldown of the US Treasury Department’s position in American International Group on September 10 2012 was a triumph not only for AIG itself, but the Obama administration and US taxpayers as well. The sale highlighted a profitable exit that few would have thought possible when the Treasury, along with the Federal Reserve, committed US$182bn of taxpayer funds as the insurer verged on collapse during the 2008 financial crisis.

The US$20.7bn offering, including a sizeable US$2.7bn greenshoe, was the biggest of the five successive deals totalling US$47bn and starting with AIG’s re-IPO in May 2011. Significantly for investors, the trade represented a clean-up of the government overhang, as the Treasury reduced its stake from a controlling 53.4% to 15.9%.

For the large underwriting syndicate led by Citigroup, Deutsche Bank, Goldman Sachs and JP Morgan as joint global co-ordinators, the stakes were high even though the so-called patriotic fees on the deal were not.

The banks took extra care to solicit participation from key institutions that were damaged in the government bailout of AIG and had yet to meaningfully participate in the selldowns.

“There’s absolutely no room for failure on these deals,” said Jeff Mortara, Deutsche Bank’s managing director of FIG ECM. “[The transaction] was backstopped at a level of quanta unprecedented for most of us in our careers.”

Indeed, a series of non-deal roadshows conducted by the company helped pave the way by educating investors in Europe and Asia.

That effort extended to announcing the sale on Sunday, September 9, providing early momentum from foreign investors prior to the formal US launch the following day.

Such co-ordination was in stark contrast to other secondary sales of AIG stock by the Treasury, which sought to ensure price execution through unusual timing, highlighted by an over-the-weekend placement in May. Some of the early sales traded poorly in part because of their over-reliance on hedge funds able to build short positions.

Extensive lead-up work meant the syndicate already had significant demand in hand (nearly half of the deal). Reverse enquiry from investors that had anticipated the sale provided additional momentum to the bookbuild, given expectations of a sale following the expiration of lock-up restrictions in August associated with the previous sale by the Treasury.

Still, the company and its investment banks left nothing to chance. A commitment to purchase up to US$5bn of the Treasury’s stock, a hallmark of earlier sales, helped limit the overall call on investors.

The formal marketing saw two management teams complete one-on-one conference calls with 31 institutions – resulting in a 94% hit rate – as well as a group investor call with more than 300 investors.

Positioning the transaction as the clean-up trade, AIG and the syndicate reinforced that this was the last big opportunity for investors to accumulate AIG shares.

Similarly important to that thesis was a view that the residual position was small enough that the government could choose to sell on the open market through an at-the-market sales programme.

The extent of investor demand was such that the marketing period was cut to one day, from two to reduce market exposure. The shortened schedule and extensive pre-marketing helped lock in pricing at US$32.50, just 4.4% below pre-launch levels and compared to a 7.2% discount average for global jumbo offerings.

Most importantly for taxpayers, the pricing was well north of Treasury’s break-even mark of around US$29. Treasury was able to declare that not only had the government fully recouped all monies invested in the AIG bailout, it had turned a US$12.4bn profit.