1 ) Did anyone notice the following line listed below in the press release tonight? AIG signed a commitment letter but has not closed on the total facility. I know that they have drawn down monies already but it seems that they still have further paperwork to address. I am probably splitting hairs but it is interesting especially given the efforts of the shareholders to avoid 80% dilution and their somewhat hopeful comments this afternoon. Who knows if some Legal option actually remains if the closing has not fully occurred?
The facility provides for an initial gross commitment fee of 2% of the total facility on the closing date.
2) The Convertible Preferred Stock would clearly be converted if this was one private entity purchasing another private entity that has gained in value. People state that the taxpayers should be protected and I clearly agree. However, the loan provisions (alone) which the government negotiated are highly profitable and will insure that the taxpayers reap a nice return. The Govt will make lots of money on this transaction given the high interest rate that is being charged.
That leaves the major question as to what will eventually happen to the Convertible Preferred Stock? Is is an insurance policy to make certain that AIG behaves or is it the intent of the government to exercise and convert to common shares? If they did convert they would dilute the common shares as many have noted.
When a company issues Convertible Preferred Stock, they usually set the conversion terms with their underwriter. We have seen no conversion terms mentioned so far. Dilution is coming but I am unsure to what extent.
When do you think the exact conversion terms will be available to the market? I have to believe their is some formula that reflects the amount of monies borrowed multiplied by the time to repayment. I think the Govt will reward AIG for doing what they desire in quick order. There has to be a "carrot" and a "stick" with this arrangement.
The stock valuation is highly dependent on the dilution issue.
The Govt is off to good start in this new era of "transparency!!"
How can any anyone make an informed investment decision.?
Well potential dilution. When a company issues stock options to key employees, convertible bonds, convertible preferreds etc, that potential dilution is by accounting rules to be factored into eps. If the dilution is not realized, via one reason or another, the dilution no longer exists for accounting purposes.
You hit the nail on the head, the preferred issuance is an insurance policy to make sure that AIG behaves themselves.