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Sale of AIG Life Units May Pay Back Billions in Debt

Source: A.M. Best

Posted on 16 Mar 2010

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A spokesperson for American International Group, Inc. (AIG) says the insurer is on track to potentially manage to pay back more than $50 billion in debt, thanks to its sale of AIA Group to Prudential PLC and American Life Insurance Co. to MetLife.

According to Mark Herr of AIG, the sales are being touted as a "reflection of wisdom in not engaging in fire sale transactions, waiting to maximize the return.” Herr says that just a year ago, AIG was hoping the life insurance subsidiaries would fetch $25 billion.

Where the Cash Is Going

The transactions will provide AIG with about $31.8 billion in cash to use immediately to pay down its outstanding balance to the Federal Reserve Bank of New York. AIG closed two transactions late last year to reduce the debt it owed the bank by $25 billion.

AIG placed the equity of AIA and Alico into special purpose vehicles. The FRBNY got preferred interests with a liquidation preference in the AIA vehicle of $16 billion and $9 billion for the Alico vehicle, as reported in BestWire, Dec. 1, 2009.

With the $25 billion in cash from the AIA sale -- the largest for AIG to date -- the company can wipe out the $16 billion of preferred interest the FRBNY has in AIA and use $9 billion on the FRBNY's revolving credit facility. At the end of 2009, AIG owed $17.9 billion in revolving credit plus about $5.5 billion in interest and fees.

However, AIG does not have enough cash from the Alico deal to redeem all of the $9 billion of preferred interest the FRBNY holds in Alico. AIG will give the FRBNY the $6.8 billion it got in cash from MetLife.

The Plan for the Rest

AIG will look to repay the remainder of the FRBNY preferred interest in Alico when it is able to sell $8.7 billion in securities of MetLife over time. Other revenue from the sale of securities can go toward the credit facility.

Herr said AIG can sell a certain amount of securities after nine months and another amount after 12 months. AIG expects to generate more than $19 billion in securities from both deals "subject to the market; that's our best look at it today," Herr said.

When MetLife confirmed it was talking to AIG about a deal, A.M. Best Co. said the magnitude of the transactions is significant. "As a result, there is uncertainty with respect to the impact on MetLife's balance sheet, capitalization and financial metrics; thus, the ratings have been placed under review with negative implications," A.M. Best said of MetLife's current Best's Financial Strength Rating of A+ (Superior).

If all goes according to plan, the Alico and AIA transactions will result in AIG repaying the government about $50.7 billion of the $95 billion it owes as of Dec. 31, 2009. The federal government made available about $182 billion. Herr said AIG's outstanding balance fluctuates as it taps the credit facility and continues to repay it on a fairly steady basis. Neither deal has any bearing on $47.3 billion owed to the U.S. Department of the Treasury.

The FRBNY Role

The FRBNY has a monitoring role in the transactions but the final say lies with the board of AIG. At the start of 2009, the FRBNY, with the support of the Treasury Department, established the AIG Credit Facility Trust to "protect interests of the U.S. Treasury and thus the U.S. taxpayers with respect to the voting equity interest in AIG," according to the FRBNY.

The trust was given 100,000 shares of stock by AIG. Its three trustees look to make sure taxpayers benefit from any sale of AIG shares, avoid conflicts or legal impediments that could result in the government exerting control over AIG and avoid conflicts with the FRBNY's supervisory and monetary policy functions. The FRBNY said it is not involved in negotiations, though it does sit in on meetings.

What's Next?

AIG will turn its attention to the U.S. Treasury preferred interests, said Angelo Graci, desk analyst with Chapdelaine Credit Partners. The company is expected to undergo a series of restructuring efforts, which could involve exchanges of hybrid or preferred securities into common equity or it can issue new shares, Graci said.

AIG reported a net loss of $8.9 billion in the fourth quarter and reported loss reserve strengthening of $2.3 billion in commercial insurance, and a valuation allowance charge of $2.7 billion.

The company has said it would look to asset sales and reviving business to repay debt, scrapping a plan to securitize part of its life insurance book.

It is doubtful AIG has any other significant assets it can sell. Graci said he isn't aware of any that have been identified for sale. Further asset sales will be insufficient to repay the Troubled Asset Relief Program preferred interests, Graci said.

Robert Benmosche, president and chief executive officer of AIG, said during a town hall in London earlier this month that there is potential for growth in its property/casualty unit, Chartis, and retirement savings products in the US.