2007

Risk Indicator?

Everyone who studies markets has a favorite indicator of market direction or risk. Based upon a recent loan syndication, we may have a new one. It is our understanding that AIG Commercial Equipment Finance Inc. (“AIG”) went up-market and participated in the Fortis-run $770 million Senior Secured Credit Facility for Aker American Shipping to the tune of $50 million. This facility provided the permanent financing for the company’s ownership of the first ten vessels, which are bareboat chartered to OSG and then long-term sub-chartered to major oil companies for use in the Jones Act trade. Based upon the OSG bareboats, we also understand that pricing was in the range of LIBOR + 150 bps which was then swapped out.

What intrigues us is AIG’s motivation for entering into this deal and what it signals about AIG’s perspective on the current risk-reward climate. In an historical context, finance companies worked the weaker credits because of their willingness and ability to assess and take on risk for a proper reward (i.e. higher spread). Generally, they are more comfortable than banks with taking a view on the market as well as the asset and financing on a project basis, relying on the asset paying you back instead of a credit. Deals in this category generally are highly structured, in many respects like this one.

This is only an excerpt of Bank Debt – 04/12/2007

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