Mergers & Acquisitions and Credit Crisis and Public Companies and Banking & Finance and American General Finance

AIG sells American General unit to Fortress at loss

August 11, 2010

American International Group Inc. has agreed to sell a majority stake in its Evansville-based consumer lending unit, getting rid of an operation that posted about $1.7 billion in operating losses since 2008 and accumulated more than $17 billion in debt.

Fortress Investment Group LLC will take an 80 percent stake in American General Finance Inc., with AIG retaining the rest, according to a statement released Wednesday. Terms were not disclosed, but sources pegged the price at about $130 million.

AIG will book a pretax loss of about $1.9 billion on the deal, according to a filing from the New York-based insurer, which previously valued the unit at about $2.4 billion.

“The business has been pressured for some time, it was clearly non-core to AIG,” said Jonathan Hatcher, a Jefferies Group Inc. desk analyst and former Federal Deposit Insurance Corp. bank examiner. “I don’t think the market believed AGF was worth $2.4 billion given everything that has happened in the sector.”

Financial companies are scaling back consumer-lending operations after funding dried up for the businesses. Wells Fargo & Co, the fourth-biggest U.S. bank by assets, said last month it would cut 3,800 jobs and close its consumer-finance branch network. No. 3 Citigroup Inc. announced in June that it will close 376 branches and cut as many as 720 jobs at CitiFinancial lending businesses in the U.S. and Canada.

New York-based Fortress, founded in 1998 by former UBS AG executive Wesley Edens, gains a lender with about $20 billion in assets and $18 billion in liabilities, most of which is debt. Fortress managed $41.7 billion of assets in private-equity and hedge funds as of June 30. The firm went public in 2007.

AIG Chief Executive Officer Robert Benmosche, 66, is divesting assets to help repay the insurer’s $182.3 billion bailout. The company said last week it was exploring “strategic alternatives” for American General, including a sale.

American General lends cash for mortgages, personal loans, home equity lines and retailers’ clients and has more than 1 million customers. The business was founded in Evansville in 1920 and was acquired by AIG in 2001. The Fortress deal is expected to be completed by the end of March, the firms said.

The business “is well-positioned for significant growth in an underserved market,” Edens said in the statement.

The lending unit lost access to financing sources including commercial paper and unsecured debt after AIG was downgraded amid losses that led to the 2008 rescue. AIG said in February it intended to support the subsidiary through Feb. 28, 2011.

AIG was regulated before its bailout by the Office of Thrift Supervision, which oversees lenders. The OTS failed to limit risks from credit-default swaps at the insurer’s derivatives unit, the Congressional Oversight Panel said in a June report.

“We were clearly responsible as the consolidated regulator for AIG,” Scott Polakoff, then-acting director of the OTS, testified before Congress last year. “We in 2004 should have taken an entirely different approach than what we wound up taking regarding the credit-default swaps.”

American General cut 1,400 jobs and closed 196 branch offices last year, the unit said in a March filing. The business posted operating losses of $723 million in 2008, $868 million in 2009 and $143 million in the first six months of 2010.

The unit’s debt may be downgraded by Fitch on the prospect that “new ownership and existing management may potentially seek to engage in some type of business reorganization, up to and including a restructuring of the firm’s capital structure,” the bond-rating firm said in a statement Wednesday.

The unit could have been put through bankruptcy, the Oversight panel said in the June report. The approach would “avoid indirectly subsidizing money-losing subsidiaries and their creditors,” according to the report.

AIG has been booking losses on deals to divest units including Nan Shan Life Insurance Co. and American Life Insurance Co., which sell policies outside the U.S. AIG posted a second-quarter net loss last week after taking a $3.3 billion accounting charge tied to Alico. The charge tied to American General will be incurred in this year’s third quarter, the company said.

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