AIG Ready to Repay New York Fed; Makes Deals in Japan
October 1, 2010 by ALLISON BELL
- By ALLISON BELL
Published 9/30/2010
American International Group Inc. (AIG) says it will soon have the cash to repay and terminate a $20 billion Federal Reserve Bank of New York credit facility.
AIG, New York (NYSE:AIG), says the plan to repay the New York Fed credit facility is part of a larger agreement-in-principle with the U.S. Treasury Department, the Federal Reserve Bank of New York and the AIG Credit Facility Trust.
The agreement describes how AIG will use Troubled Asset Relief Program (TARP) funds and future revenue to buy back $26 billion in U.S. government interests in two AIG-related special purpose vehicles, and the agreement also calls for AIG to use common stock and warrants to repay about $49 billion the company owes to the Treasury Department under TARP.
In related news, AIG and Prudential Financial Inc., Newark, N.J. (NYSE:PRU), say Prudential has agreed to pay a total of $4.8 billion for two AIG life insurance subsidiaries in Japan, AIG Star Life Insurance Company Ltd. and AIG Edison Life Insurance Company. The price of that deal includes $4.2 billion in cash and $600 million in the assumption of third-party debt, the companies say.
THE AGREEMENT-IN-PRINCIPLE
Because of the disastrous effects of the 2008 credit crisis on AIG’s credit default swaps operations, AIG had to seek government aid. The New York Fed began supporting AIG in September 2008, when Henry Paulson was the Treasury secretary and Timothy Geithner, who is now Treasury secretary, was president of the New York Fed.
AIG can pay off the New York Fed credit facility using resources from AIG itself and the proceeds from a variety of asset sales, including the pending sale of American Life Insurance Company (ALICO), a major life insurance company in Asia, to MetLife Inc., New York (NYSE:MET), AIG says.
AIG provided collateral for some of the help it was getting from the government by putting ALICO and another major subsidiary in Asia, American International Assurance Company Ltd. (AIA), in the two special purpose vehicles. The New York Fed holds about $26 billion in preferred interests in the special purpose vehicles.
AIG will use $22 billion in TARP aid and the proceeds from the sale of AIG Star Life and AIG Edison Life to Prudential to retire the New York Fed special purpose vehicle preferred interests, AIG says.
AIG then will give the Treasury Department the special purpose vehicle preferred interests in exchange for the $22 billion in TARP funds.
To retire the Treasury Department’s special purpose vehicle preferred interests, “AIG will apply the proceeds of future asset monetizations, including its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife closes,” AIG says.
Meanwhile, the Treasury Department and the AIG Credit Facility Trust already hold about $49 billion in AIG preferred shares in connection with TARP aid.
To repay that $49 billion, AIG will hand over about 1.655 billion shares of AIG common stock. AIG also will issue up to 75 million warrants with a strike price of $45 per share to existing common shareholders.
The Treasury Department will end up holding 92.1% of AIG’s common stock, and the department could then sell the AIG common stock on the open market, AIG says. Today, the Treasury Department controls the equivalent of about 80% of AIG’s common stock.
As a result of the move to issue AIG common shares to the Treasury Department, the department would “become AIG’s controlling stockholder,” the company says in a report filed with the U.S. Securities and Exchange Commission. The Treasury Department could control mergers, acquisitions, the sale of all or most of AIG’s assets, the issuance of additional common stock, and other matters that might be good for the Treasury Department but not for AIG’s other shareholders, AIG says.
AIG hopes to pay off the New York Fed and issue the common stock to the Treasury Department by March 31, 2011.
AIG President Robert Benmosche says the deal sets forth a clear path for AIG to repay the New York Fed in full and starts the process of having the Treasury Department dispose of its interests in AIG.
“We are very pleased that this agreement vastly simplifies current government support of AIG,” Benmosche says in a statement.
JAPAN
AIG Star and AIG Edison have a total of 10,400 employees. They sell life, medical and annuity products through career agents, brokers and banks.
They are part of a formidable group of AIG operations in Asia. AIG was once so successful overseas that conspiracy buffs
suggested AIG might be an arm of the Central Intelligence Agency. Since the credit crisis forced AIG to seek emergency financing from the New York Fed and the Treasury Department, AIG has seen selling the much-coveted operations in Asia as a way to raise the cash needed pay the government back.
AIG Star and AIG Edison “generated significant interest in the capital markets,” Benmosche says.
Prudential made a good offer for the companies, and it is a buyer that will continue to solid customer service and innovative products for AIG Star and AIG Edison customers, Benmosche says.
AIG and Prudential expect to close on the AIG Star-AIG Edison deal by March 31, 2011.
Securities analysts at UBS Securities L.L.C., New York, say low interest rates could hurt earnings at AIG Star and AIG Edison, but Prudential should have an easy time combining the companies’ operations with the operations of its own companies in Japan, and the deal could help Prudential cut costs by about $250 million per year, the analysts say.
AIG
Benmosche has suggested that U.S. taxpayers could end up earning a profit on the New York Fed and Treasury Department investment in AIG.
The government intervened in the first place because of fears that problems with the swaps operations at the AIG Financial Products unit could destabilize the financial markets. AIG had used swaps to protect holders of collateralized debt obligations against the risk of issuer defaults at a time when the idea of large numbers of issuers defaulting seemed unlikely. Then, in 2007, large numbers of borrowers began missing loan payments, and what had originally seemed to be a safe bet proved to be riskier than AIG had expected.
When the government began to help AIG, the financial products unit had $2 trillion in derivatives exposure, Benmosche says in an AIG message to investors posted on the company website.
At mid-year, unit derivatives exposure was down to $602 billion, Benmosche said.
The unit “will not longer pose a significant financial risk to either AIG or the broader financial system,” he said.
Chad Hemenway contributed information to this article.
