American International Group Inc. says it will be using $40 billion in Troubled Assets Relief Program cash to restructure some of its debt.

The U.S. Treasury Department today used TARP funding to pay $40 billion for 4 million shares of AIG Series D preferred stock, according to AIG, New York.

The preferred shares are set to pay a 10% annual dividend.

Treasury also is getting a warrant with a term of 10 years that gives it the ability to buy up to 54 million shares of AIG common stock. The exercise value would be the par value of AIG common stock at the time the warrant is exercised, AIG says.

If Treasury exercised the warrant today, the exercise price would be $2.50, according to a report on the transaction that AIG has filed with the U.S. Securities and Exchange Commission.

“The Treasury Department has agreed that it will not exercise any voting rights with respect to the common stock issued upon exercise of the warrant,” AIG says in the SEC filing.

If AIG redeems the Series D preferred shares, or Treasury transfers them to some other party, then AIG can buy the warrant back for the fair market value as long as no holder of the warrant controls or has the potential to control AIG, the company says.

Federal law and the U.S. District Court for the District of Columbia will have jurisdiction over the warrant, and, if the federal court wants to refer to state law, then New York state law will be the governing law, according to a copy of the warrant included in AIG’s SEC filing.

AIG says it will use the proceeds from the preferred stock sale to pay back some of what it has borrowed from the $85 billion emergency credit facility set up by the Federal Reserve Bank of New York in September.

The maximum capacity of the credit facility will go down to $60 billion, AIG says.