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AIG, Chartis Obtain $4.3 Billion in New Credit Lines from Commercial Banks

Source: WSJ

Posted on 28 Dec 2010

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Insurance giant AIG is taking yet another step on its road to recovery, obtaining $4.3 billion in new credit lines from commercial banks to replace its funding from the Federal Reserve Bank of New York.

AIG said it has established $3 billion in bank credit facilities, split between a 364-day line and a three-year facility, under which banks have agreed to make loans to AIG. In addition, AIG's property and casualty insurance subsidiary, Chartis Inc., entered a one-year, $1.3 billion letter of credit facility.

The new funding is being provided by 36 banks and will be available to AIG once the company pays down and terminates its secured credit facility from the New York Fed, which was established when the government bailed out the insurer in September 2008.

AIG shares surged more than 9% following the news, closing up $5.05 at $59.38 in 4 p.m. New York Stock Exchange trading on Monday. The shares have nearly doubed in the year to date, and have gained 51% since Sept 30, when AIG mapped out a plan to speed up its repayment of taxpayer aid and exit government ownership.

The New York company has already earmarked proceeds from recent asset sales to fully repay some $20.6 billion outstanding under the New York Fed facility.

The facility is to be repaid and terminated in the coming weeks when AIG and the government close on a recapitalization agreement that will pave the way for the Treasury Department to start selling a 92% ownership in the company in 2011.

AIG's ability to obtain new unsecured credit lines from commercial banks marks a milestone in the insurer's complex restructuring.

In the autumn of 2008, the company was forced to seek a federal bailout after losing access to private sources of funding and finding itself in a liquidity crisis.

Earlier this month, AIG sold its first unsecured bonds in more than two years, raising $2 billion. It also established a $500 million liquidity facility that it can draw on in the future.

Together with the new bank lines and a sale of new shares to investors next year, AIG is trying to line up a total of $11 billion to $12 billion in liquidity to support itself going forward.

Lenders participating in the new credit facilities include units of J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Morgan Stanley, Goldman Sachs Group Inc., Barclays PLC and others.

The terms of the credit lines require AIG to maintain certain financial metrics, including a minimum net worth of $59.6 billion and limits on its total debt.

In a statement Monday, AIG Chief Executive Robert Benmosche said the new facilities represent "another important vote of confidence by the market in AIG," which he said was gaining momentum after making substantial progress in its restructuring in 2010.

"As we approach year's end, we believe we are close enough to completing our recapitalization plan that we can see the finish line," Mr. Benmosche said.

There is still a long way to go before AIG can regain independence. The government's majority stake in AIG is currently worth roughly $70 billion, and analysts expect it will take at least a year or two to sell off that much in shares to private investors.