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AIG and Government Agree to Exit Plan and Repayment Strategy

Source: WSJ

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Posted on 30 Sep 2010

After meeting with U.S. government overseers, American International Group Inc.'s board have agreed in principle on a plan that would expedite payment of the giant insurer's taxpayer debt and pave the way for the U.S. to exit its ownership of the bailed-out company.

The Treasury Department as part of the plan would convert $49.1 billion of preferred shares it holds in AIG into common shares and increase the government's ownership stake in the company to 92.1% from 79.8% currently. The conversion, which could take place in early 2011 if AIG can meet certain conditions by then, would position the government to sell off its stake in AIG over time through a series of share sales in the open market.

Before the conversion of the Treasury's shares can occur, AIG would have to repay a $20 billion secured credit facility from the Federal Reserve Bank of New York in full. AIG said it plans to use proceeds from major asset sales and the upcoming initial public offering of its pan-Asian life-insurance unit to pay down its taxpayer debt and terminate the credit facility well before it is scheduled to expire in 2013.

AIG's publicly traded shares closed Wednesday at $37.45. At that level, the 92.1% stake the Treasury is expected to hold in AIG implies a stock market value for the company of well over $60 billion, which would make it one of the largest publicly traded financial institutions in the U.S. after the conversion. The Treasury will receive 1.655 billion common shares in AIG.

In early trading Thursday, AIG shares were up 6.3% at $39.79.

About $5 billion of AIG shares are currently held by private investors, who would be given up to 75 million warrants that would let them benefit from gains in the stock alongside the government. The strike price is $45 a share. The government could profit on its investment if its AIG shares can be sold above $30 apiece, a person familiar with the matter said.

In a recorded message on the insurer's website Thursday morning, Chief Executive Officer Robert Benmosche said he is confident AIG would repay taxpayers at a profit.

The Treasury is also going to take over the majority of the New York Fed's interests in two special-purpose vehicles that are positioned to recoup $26 billion from the sales of AIG's overseas assets. Mr. Benmosche said the agreement "vastly simplifies current government support for AIG" and the plan will enable AIG to "concentrate our full attention on managing our businesses for the benefit of all our stakeholders."

The exit plan marks a milestone for both AIG and government officials. The company, a fraction of its former self after it nearly collapsed in September 2008, is trying to regain independence and access to private-sector financing, which it hasn't tapped in two years. The government, which has provided more than $120 billion in taxpayer support to AIG, is eager to get the controversial and costly crisis-era bailout behind it.

Treasury Secretary Timothy Geithner said in a statement that the AIG exit strategy "dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company."

"While there is a lot of work ahead to execute the terms of this agreement," Mr. Geithner said, "today we are much closer to seeing a clear path out."

Still, analysts note, the exit plan is just a beginning; it could take years for the government to completely dispose of its shares in AIG, and much will depend on the insurer's business performance and market conditions. Some federal officials are hoping the sales would take as little as 18 months to complete, according to another person familiar with the matter.

On Thursday morning, AIG also announced it has reached a deal to sell two Japanese life-insurance units to Prudential Financial Inc. for $4.8 billion, of which $4.2 billion is cash AIG will use to repay the government. AIG is also preparing for a Hong Kong initial public offering at the end of October of its pan-Asian business, known as AIA Group Ltd, aimed at raising as much as $15 billion.

Separately, AIG is set by year-end to close a $15.5 billion deal to sell its second-biggest overseas-based life-insurance unit, American Life Insurance Co., or Alico, to MetLife Inc. Alico has a large presence in Japan and Europe.

AIG's board of directors and federal officials met until late in the evening Wednesday, and in some cases into the early hours of Thursday, to finalize the terms of the widely anticipated exit strategy.

Robert S. "Steve" Miller, AIG's chairman, said completing the talks over the exit package "was a real marathon" for board members and executives.

last 48 hours have been just nonstop nailing down one open point after another," he said in an interview Thursday morning after wrapping things up past midnight. "Anything we could have missed could have stopped the deal."

Among other things, Mr. Benmosche called several state insurance regulators Wednesday about the pending exit plan, Mr. Miller said. "We gave them assurances that we were not going to increase the risk to the individual insurance companies regulated by the states" because the plan would recapitalize the holding company without taking "resources away from the entities being regulated."

The plan required approval from the Treasury, the Federal Reserve, AIG's board, and three trustees that oversee the government's majority interest in AIG. A statement from the trustees Thursday said they voted unanimously in support of the AIG recapitalization plan.

Morgan Stanley advised the New York Fed on the exit plan and the broader AIG restructuring.


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