AIG Gets A Break In U.S. Loan Deal

Specifically, the new credit agreement calls for the U.S. Treasury to purchase, through TARP, $40 billion of newly issued AIG perpetual preferred shares, as well as warrants to buy a number of shares of common stock of AIG equal to 2 percent of the issued and outstanding shares as of the purchase date.

All of the proceeds will be used to pay down a portion of the Federal Reserve Bank of New York (FRBNY) credit facility. The perpetual preferred shares will carry a 10 percent coupon with cumulative dividends.

A revision of the existing FRBNY credit facility to reflect, among other things:

o The total commitment after perpetual preferred shares are issued will be $60 billion.

o The interest rate will be reduced to the London Interbank Offered Rate (known as LIBOR, the rate charged by one bank loaning to another) plus 3 percentage points per year, from the current rate of LIBOR plus 8.5 percentage points per year.

o The fee on undrawn commitments will be reduced to 0.75 percent from the current fee of 8.5 percent.

o The term of the loan will be extended from two to five years, giving AIG more time to complete its planned sale of company assets–the proceeds of which will be used to repay the credit facility.

In connection with the amendment to the FRBNY credit facility, the equity interest that taxpayers will hold in AIG, coupled with the warrants described above, will total 79.9 percent.

The one-time transactions involve the creation of two financing entities capitalized with loans from AIG and the FRBNY.

These entities will buy assets related to AIG's U.S. securities lending program and Multi-Sector Collateralized Debt Obligations (CDOs) on which AIG has written credit default swap (CDS) contracts.

The entities will collect cash flows from the assets and pay interest on the debt. FRBNY and AIG will share in any recoveries in the market prices of the assets.

In addition, AIG will transfer residential mortgage-backed securities (RMBS) from its securities lending collateral portfolio to a newly-created financing entity that will be capitalized with $1 billion in subordinated funding from AIG, as well as senior funding from the FRBNY up to $22.5 billion.

After both amounts have been repaid in full by the financing entity, the parties will participate in any further returns on RMBS. As a result of this transaction, AIG's remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to closing and its $1 billion of funding.

This financing entity, together with other AIG funds, will eliminate the need for the U.S. securities lending liquidity facility established in October by AIG and FRBNY, which on Wednesday had $19.9 billion outstanding.

Upon repayment to all participants, AIG will terminate its U.S. securities lending program.

Meanwhile, AIG and FRBNY will create a second financing entity that will purchase up to approximately $70 billion of Multi-Sector CDO exposure on which AIG has written CDS contracts. AIG noted that approximately 95 percent of the write-downs AIG Financial Products has taken to date in its CDS portfolio were related to Multi-Sector CDOs.

In connection with this transaction, CDS contracts on purchased Multi-Sector CDOs will be terminated. AIG will provide up to $5 billion in subordinated funding and FRBNY will provide up to $30 billion in senior funding to the financing entity.

As a result of this transaction, AIG's remaining exposure to losses on the Multi-Sector CDOs underlying the terminated CDS contracts will be limited to declines in market value prior to closing and up to $5 billion in funding to the financing entity. As with the securities lending program, FRBNY and AIG will share in any recoveries in the market prices of assets.

AIG said it will continue to have exposure to CDS contracts on Multi-Sector CDOs that are not terminated. As AIG winds down its Financial Products division, it will also have exposure to other types of remaining CDS contracts, which have generated substantially smaller total collateral demands than the CDS contracts on Multi-Sector CDOs.

According to AIG, taxpayers will benefit from the transactions with AIG as follows:

o Fees, interest and repayment of the FRBNY loan in full.

o Payment of a 10 percent coupon on the newly issued preferred shares.

o Cash payments from the assets purchased by the two financing entities.

o Potential asset appreciation in the underlying securities held by those entities.

Taxpayers will own 77.9 percent of the equity of AIG, and will hold warrants to purchase an additional 2 percent equity interest, and so will benefit from any future appreciation in AIG shares, the company noted.

AIG will also continue to participate in the recently launched government program being used by many companies for the sale of commercial paper. The Commercial Paper Funding Facility (CPFF) has allowed AIG to reenter the commercial paper market, the company said, authorizing AIG to issue up to $20.9 billion to the CPFF. AIG has currently issued approximately $15.3 billion.

AIG's chairman and chief executive officer, Edward M. Liddy–in advance of a conference call briefing today–said in a statement that the agreements "send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery."

He said the new finance plan "addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies."

He said the additional tools will make possible an "orderly" sale of company units to raise cash, and promised the company's "goal is to repay taxpayers in full with interest, and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders."

The agreement, he said, would put AIG on track to emerge as "a nimble competitor with good long-term growth prospects."