AIG Cuts U.S. Debt By Giving The Fed Interest In Two Firms

NU Online News Service, June 25, 2:21 p.m. EDT

American International Group, Inc. announced today it has forged an agreement with the Federal Reserve Bank of New York to have $25 billion government debt reduced by giving taxpayers a stake in two AIG firms.

In tandem with these moves, AIG said it has appointed Alain Karaoglan as senior vice president-divestiture. As head of the Divestiture Office team, Karaoglan will bring to market AIG's divesting assets and manage the resulting transactions worldwide.

AIG said the transaction with the New York Fed, besides cutting its debt, will position its two international life insurance franchises, American International Assurance Company, Ltd. (AIA) and American Life Insurance Company (ALICO), for initial public stock offerings, "depending on market conditions."

Edward Liddy, AIG chairman and chief executive officer, said the move was part of a big effort to pay back taxpayers and keeping the value of the two units, which would be difficult to sell for a good return under current market conditions.

Under the agreement with the Fed in New York, AIG will contribute the equity of each of AIA and ALICO to separate special purpose vehicles (SPVs) in exchange for preferred and common interests in the SPVs. The Fed will receive preferred interests in the AIA SPV of $16 billion and in the ALICO SPV of $9 billion.

The face value of the preferred interests, AIG said, represents a percentage of the estimated fair market value of AIA and ALICO. AIG will hold the common interests in the AIA and ALICO SPVs and will benefit from the fair market value of AIA and ALICO in excess of the value of the preferred interests as the SPVs monetize their stakes in these companies in the future, AIG explained.

When the transactions close, AIG's debt to the Fed for a credit facility will be trimmed by $25 billion. As of today, AIG said its outstanding balance under the Fed credit facility is approximately $40 billion.

The company said it expects the transactions on the two companies to close in the second half of 2009.

It was explained that until their separation as independent companies, AIA and ALICO will remain wholly owned subsidiaries of AIG, consolidated in AIG's reported financial statements.

"Placing AIA and ALICO into SPVs represents a major step toward repaying taxpayers and preserving the value of AIA and ALICO, two terrific life insurance businesses with great futures," said Edward Liddy, AIG chairman and chief executive officer, in a statement.

"Operating AIA's and ALICO's successful business models in the SPV format will enhance the value of these franchises as we move forward with our global restructuring."

A Fed statement said, "The agreements further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company's global restructuring process. The exchange of senior secured debt for preferred equity interests reduces AIG's financial leverage and facilitates the independence of these two key subsidiaries."

Mr. Karaoglan, prior to joining AIG, served as managing director-equity research at Banc of America Securities LLC. There, he led the financial services equity research team that covered insurance, banks, investment banks, asset managers, consumer finance, exchanges, and REITs.

The company said he will report to Paula Rosput Reynolds, AIG vice chairman and chief restructuring officer. Mr. Karaoglan succeeds Philip Jacobs.