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Zecco.com » General Investing » Portfolio Building » AIG Bonds
Last post 07-19-2009, 12:38 PM by lucasjkr. 13 replies.
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  •  06-10-2009, 3:16 AM 58597

    AIG Bonds

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    So I was looking at some bond screens today and ran across a few AIG bonds. These suckers are yielding about 40-50% YTM. Now that means its a very very risky play but I just dont see how it could be so risky!? The government has pretty much propped this company up and taken ownership, so why would it default on its bond obligations? Any thoughts or ideas? I did some math and about $960 puchase would net you 3 bonds at 320 each with a maturity date in 2014. At 5.5% coupon this turns out to be about $176 dollars annually at the current rate plus $3000 on the maturity date.

  •  06-10-2009, 5:05 AM 58599 in reply to 58597

    Re: AIG Bonds

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    3 bonds yielding 5.5% each would earn you $55 per year per bond, or $165 per year (not $176). And the government has been guaranteeing specific obligations of AIG's, not all of its obligations. The government is a common shareholder, meaning that it's only capital at risk is the capital it's invested... The moment it says it doesn't feel like adding more equity is the moment those bonds won't be honored. Ask GM bondholders how having the government as a backstop worked out for them.

    That's in contrast to the GSE's, FRE and FNM, where the government specifically said that it would honor their bond obligations. Due to that specific guarantee, the bonds only yield a few basis points over long term treasuries.

  •  06-10-2009, 12:27 PM 58618 in reply to 58599

    Re: AIG Bonds

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    Yes correct sorry lol it was like 2am in the morning when I posted that. Anyways as far as I know though the government has not stopped paying the interest and doing so would essientially push AIG into bankruptcy, which is not the case at the moment. In GMs case it was when the company actually filed for bankruptcy that it was no longer able to meet its oblications. You really think the feds would stop feeding AIG more money after everything its already invested? I can just see the tax payer uproar after that.            

  •  06-10-2009, 1:56 PM 58626 in reply to 58618

    Re: AIG Bonds

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    Yeah, the interest payment amount looked like a typo, but still wanted to correct.

    Almost all of the money that the government has put into AIG to date has been to pay counterparties on its obligations (CDS's, etc). That cash may look like its an equity investment, but it was really just a means to prop up the rest of the market. Once the rest of the market has been deemed to be stable, they'll probably separate out the "good" parts of the business and let that go on, and let the bad parts fall away, as there's not going to be any equity left.

  •  06-10-2009, 2:23 PM 58627 in reply to 58626

    Re: AIG Bonds

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    With that thinking in mind that the government is putting money into AIG to pay its obligations, aren't bonds obligations? I don't think we'll see AIG move anywhere to bankruptcy. Maybe broken and sold off in little pieces.

  •  06-10-2009, 2:57 PM 58629 in reply to 58627

    Re: AIG Bonds

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    The government wasn't trying to protect all of AIG's obligations. Just the ones that it though posed systemic risk. Again, look at the Yield to Maturity of equivalent bonds issued by the US Government, FNM or FRE and you'll see what the market is pricing US Gov't debt at. Now look at the YTM of these AIG bonds. Unless you're a professional bond trader (which i won't pretend to be!) it's much safer to assume that the pro's have already scoured this one long before you saw its listing and it's been deemed an extreme gamble than anything else.

  •  06-19-2009, 1:27 PM 59182 in reply to 58629

    Re: AIG Bonds

    Reply Quote

    Im a little new at this so please bear with me. If i were to invest 320 and get 1 bond how much would i have in 2014 if they matured the full amount?  Also where do you look these values up and how do you trade them on this site? do you know the fees? Thank you

  •  06-19-2009, 1:46 PM 59183 in reply to 59182

    Re: AIG Bonds

    Reply Quote
    Each bond would be worth $1000 at maturity (all bonds are) and you would receive that and your $55 annual interest rate from the coupon assuming that they make it to 2014. If you sell before maturity date, the price can fluctuate.

  •  06-19-2009, 2:25 PM 59190 in reply to 59183

    Re: AIG Bonds

    Reply Quote
    DanielM:
    Each bond would be worth $1000 at maturity (all bonds are) and you would receive that and your $55 annual interest rate from the coupon assuming that they make it to 2014. If you sell before maturity date, the price can fluctuate.


    Again, before you make your purchase of these bonds, ask yourself why they all haven't been scooped up by professional asset managers. Sure, there's a chance to make a killing, but there's an equal (or great, given the pricing) chance that they'll simply go bust. Maybe you'll get a few interest payments, maybe not...

  •  06-19-2009, 2:40 PM 59193 in reply to 59190

    Re: AIG Bonds

    Reply Quote
    I'm not buying any I just found it very curious. Your explanation was helpful and if I had some money to play with that I'd be comfortable with losing I'd consider it. Unfortunately I'm just a college student with a small pittance that I have on here. This company should have gone bankrupt a while back but if uncle sam is keeping it a float I think they will go ahead and keep making the interest payments on the bonds until it calls them back and finds another way to finance their debt.

  •  06-19-2009, 2:57 PM 59194 in reply to 59193

    Re: AIG Bonds

    Reply Quote
    If the rest of the world believed that, they would trade at about the levels of debt issued by Fannie Mae and Freddie Mac. Most, I think, assume that the government will continue to have them unwind many of their positions, spin off whatever profitable divisions they still have, and let the rest collapse as quietly as possible. Look at the plight of GM bond holders, for instance.

    Uncle Sam is not doing this to add an insurance company to its portfolio, its keeping AIG alive so that its institutional counterparties can get out of their positions in an orderly manner...

    Again, if ANY asset managers though otherwise, these would be scooped up already, not languishing at what looks like a tremendous yield to market. It's not as if AIG is some tiny, neverheard of entity.

  •  06-19-2009, 3:02 PM 59195 in reply to 59194

    Re: AIG Bonds

    Reply Quote
    I'm no corporate honco but even in small bits and pieces the only thing that would make sense to me is if it followed the same thing that they are doing with GM by making a good AIG (or a lot of little ones) and a bad AIG. If the bonds go to the bad unit (which I wouldn't be surprised) and then the government has the bad one filing for bankruptcy after all the assets had been sold off earlier leaving it with no value then the bond holders would get it good, though I don't think it would be a shock to anyone. Thats why I'm not gonna dabble with this but it was a good explanation.

  •  07-19-2009, 12:21 PM 60596 in reply to 58597

    Re: AIG Bonds

    Reply Quote

    Actually, Bill Gross of PIMCO is buying AIG bonds--there was recent article in Barrons or WSJ about this--and he said they were essentially guaranteed, or he believed they were as good as guaranteed--but he may not be telling the whole story.  If you check the FINRA listings of bonds on the market  it's clear that AIG bonds are paying out at both extremely high rates (at the moment 20%), but also at lower rates (7 to 8%)--so some could be "guaranteed" in some form or other, and others will eventually get tossed on the junk pile.   You'd have to be true professional to know.

    If you want the benefit of Bill Gross's expertise you can buy his Pimco High Income Fund (PHK), which is currently returning about 15%.  It's on slightly volatile side, so you'd want to check it on pretty regularly basis.  It pays on monthly basis like REITS used to do.

  •  07-19-2009, 12:38 PM 60597 in reply to 60596

    Re: AIG Bonds

    Reply Quote
    I would be wary of PHK for the simple reason that the NAV and shareprice are at such a disconnect. That a closed end fund trades at a discount or premium isn't suprising on it's own, it's just the level of the premium that's disconcerting. Almost every other closed end bond ETF i can think of trades at a discount, not a 40% premium.

    http://www.etfconnect.com/
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