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Portfolio > Asset Managers

AIG Moves Ahead With Fed Deal (Updated)

By Arthur D. Postal

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American International Group Inc. says it has signed the definitive agreement for the revolving credit facility it is getting from the Federal Reserve Bank of New York.

The New York Fed agreed last week to provide the 2-year, $85 billion credit facility for AIG, New York, to keep the company’s credit default swaps businesses from collapsing and triggering failures at other financial institutions.

AIG will pay a variable interest rate that will start at about 11.5%, or 8.5 percentage points over the current London Interbank Offered Rate, which now stands at more than 3%.

Up till now, AIG executives and government officials have been giving only vague descriptions of the credit facility.

AIG today released a few more details.

Over the past week, many have asked whether the New York Fed would start with a 79.9% stake in AIG, as implied by some descriptions of the deal, or if the New York Fed would simply get warrants and have the right to exercise the warrants under certain conditions to obtain a 79.9% stake in AIG.

AIG now says a U.S. Treasury trust will get a new series of “convertible participating serial preferred stock.”

“The preferred stock will be entitled to participate in any dividends paid on the common stock, with the payments attributable to the preferred stock being approximately, but not in excess of, 79.9% of the aggregate dividends paid,” AIG says. “The preferred stock will vote with the common stock on all matters, and will hold approximately, but not in excess of, 79.9% of the aggregate voting power. The preferred stock will be convertible into common stock following a special shareholders meeting to amend AIG’s restated certificate of incorporation.”

The description of the definitive agreement “implies that existing shareholders are now holders of a minority stake in the company and therefore the government has complete voting control,” according to an analyst who requested anonymity, partly because the information available about the credit facility is still so limited. “The shareholders have no more clout.”

AIG will have to pay an initial gross commitment fee of $1.7 billion, or 2% of the total facility, on the closing date, and it will have to pay a “commitment fee” of 8.5% on the portion of the credit facility capacity that it does not use.

AIG still has $55 billion credit facility capacity remaining. The cost of access to that unused capacity could be $4.7 billion per year, according to Thomas Gallagher and Michael Zaremski, analysts in the New York office of Credit Suisse.

“This is a very expensive facility to have in place, let alone use,” says the analyst who declined to be named. “That will be another motivation to move quickly to reconfigure the company and then pay off the loan.”

When AIG repays the amounts borrowed from the New York Fed credit facility, “these mandatory repayments permanently reduce the amount available to be borrowed under the facility,” AIG says.

The New York Fed will let AIG use the credit facility only if the New York Fed is “reasonably satisfied with, among other things, AIG’s corporate governance,” AIG says.

The facility also requires AIG to maintain a minimum amount of liquidity, and to use “reasonable efforts” to cause the composition of the AIG board “to be satisfactory to the trust holding the preferred stock within 10 days after the establishment of the trust.”

The New York Fed will treat AIG assets as collateral, but the collateral arrangement will exclude some property linked to other debt instruments and the assets of foreign subsidiaries, special purpose vehicles and “regulated subsidiaries,” AIG says.

“AIG made an exhaustive effort to address its liquidity needs through private sector financing, but was unable to do so in the current environment,” AIG Chairman Edward Liddy says in a statement about the definitive agreement. “This facility was the company’s best alternative.”

AIG now is developing a plan to sell assets and repay the facility, Liddy says.

The announcement of the New York Fed definitive agreement appears to doom an effort by some large AIG investors to find an alternative to the New York Fed credit facility, the Credit Suisse analysts write in a comment on the announcement.

“It is unclear whether AIG would be able to access the debt or equity markets prior to a large amount of asset sales,” the Credit Suisse analysts write.

If AIG wants to continue to operate some of its core businesses as going concerns, rather than selling them, it probably will need to raise capital by selling a large amount of stock in the coming year, the Credit Suisse analysts write.

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CORRECTION: Due to an editing error, an earlier version of this article gave an incorrect description of the spread between the 3-month LIBOR and the interest rate on the New York Fed credit line. The 3-month LIBOR is now more than 3%, and the interest rate on the credit line is 8.5 percentage points over LIBOR, making the total initial New York Fed credit line rate more than 11.5%.

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