AIG Prepares to Leave the Hole
January 14, 2011 by Allison Bell
- By ALLISON BELL
American International Group Inc. (AIG) is getting ready to repay the money it has borrowed from the federal government and the Federal Reserve Bank of New York.
AIG, New York (NYSE:AIG), hopes to proceed with a previously announced distribution of 75 million warrants Jan. 19.
Each warrant will entitle the holder to buy 1 share of AIG common stock, with a par value of $2.50 per share, at a price of $45 per share.
The warrant distribution is part of the recapitalization plan that AIG has arranged to dig itself out of debt.
AIG borrowed the money in late 2008, when the company was facing escalating swaps collateral calls at a time when the credit markets had all but shut down.
To execute other parts of the recapitalization plan, AIG intends to:
– Pay the New York Fed $21 billion Friday to terminate two credit facilities that the New York Fed provided during the depths of the financial crisis.
– Draw on $20 billion in federal Troubled Asset Relief Program (TARP) aid to help the U.S. government dispose of interests in a pair of purpose vehicles that AIG used to pawn two large, valuable overseas operations. AIG recently sold a 67% stake in one of the businesses, AIA Group Ltd., through a public offering, and it sold the other overseas business, American Life Insurance Company, to MetLife Inc., New York (NYSE:MET).
– Trade 1.655 billion in AIG common shares for about $49 billion in TARP preferred shares held by the U.S. Treasury Department.
If AIG completes all of the transactions as planned, the U.S. Treasury Department will end up owning about 92% of AIG’s common stock and a new series of preferred shares.
But AIG will still be one of the largest property-casualty companies in the world and a leading player in the U.S. life and retirement savings markets, AIG President Robert Benmosche says.
THE RATING AGENCIES
Standard & Poor’s Ratings Services, New York, says it had not expected AIG to pay the government back until the end of 2013.
“We view the successful execution of the planned asset sales and the accelerated repayment of the U.S. government as a positive credit development,” S&P says.
S&P has assigned an A minus counterparty credit rating to AIG, and AIG “continues to receive one notch of uplift from the stand-alone credit profile because of the continued implied support from the U.S. government,” the rating agency says.
Moody’s Investors Service, New York, has lowered the senior unsecured debt rating it has assigned AIG by one notch, to Baa1.
Moody’s says it expects the government will try to sell its AIG common shares quickly, if market conditions are favorable.
“The downgrades reflect Moody’s view that while the core insurance operations have stabilized over the past year, they have not yet improved sufficiently to justify the previous ratings in the absence of continued government support,” Moody’s says.