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AIG and Treasury Strike Deal to Reduce Fed's Stake through Credit Line Payments, Stock Issuance

Source: MarketWatch

Posted on 09 Dec 2010

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American International Group Inc. (AIG) announced on Wednesday that it has an agreement with the Treasury Department to significantly reduce the government’s 90% stake in the insurer by paying off credit lines and issuing stock.

Treasury officials say this is milestone that could eventually lead to a lucrative exit from AIG for American taxpayers.

AIG, in a filing with the Securities and Exchange Commission, said a “master transaction agreement” was struck in which it will tap $27 billion in proceeds from the sale earlier this year of AIA Aurora LLC and ALICO Holdings LLC, two of its overseas insurance subsidiaries, to pay off its credit line with the Federal Reserve.

The line was established in 2008 when the government pumped more than $100 billion into AIG to keep it from failing, a move Federal Reserve Chairman Ben Bernanke deemed necessary at the time to stem the possible collapse of global financial markets.

“Our filing today that we have signed a definitive recapitalization agreement with the government marks an important step forward in our progress toward completely repaying taxpayers,” the company said in a statement.

At the same time, the company outlined plans to sell at least $15 billion of AIG shares currently held by the government through a public stock offering in the first half of 2011. It would be the first of several stock offerings aimed at eventually severing government ties to the company.
AIG will be allowed to sell $2 billion to $3 billion in new shares in a parallel offering to help rebuild capital in the company.

According to the agreement, the Treasury Department will set the terms of the initial stock offering, and can order AIG to hold up to two common stock offerings a year until the government stake falls below 33%.

At the same time, AIG’s own proceeds from the sale of shares will be capped at $7 billion unless the company appears to again be in danger of floundering.

“Today’s announcement is a milestone in the government’s long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers,” said Tim Massad, the Treasury Department’s acting assistant secretary for financial stability.

“When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit,” he added.