Analysts are split over whether American International Group's recent troubles and ensuing spread widening have left its bonds oversold--or if now is a good time to jump off the ship. "The market is overreacting," said Scott Frost, senior v.p. and insurance analyst at HSBC Securities in New York, who recommended investors buy AIG last week despite turmoil resulting from the ouster of Chairman and CEO Hank Greenberg and the unknown magnitude of the company's upcoming financial restatement.
While there may be volatility in the short run, Frost said the long-term outlook for AIG is strong. "If you have a longer-term focus and think fundamentally it's a double-A, or even a single-A credit, it appears to be trading cheap," Frost explained. He noted AIG's 10-year paper was trading at 82 basis points over Treasuries mid-week versus St.Paul/Travelers' (A3, negative outlook/triple-B plus) 10-year paper at 80bps over. He still views AIG as a stronger credit than St.Paul/Travelers.
But Stan August, managing director and analyst at Banc of America Securities, said investors should steer clear of going long AIG until its 10-K is filed. "There's no upside to rushing out today. So you'll pay five more basis points [if there is no bad news], but then you don't have to worry," he explained. He believes it is premature to form a positive opinion on the credit. "When you start turning over rocks you never know what will crawl out," he stated.