N.Y. Fed Takes Stakes in 2 A.I.G. Units
To reduce its crushing debt, the American International Group said on Tuesday that it had completed its plan to award the Federal Reserve Bank of New York a $25 billion stake in two of its big foreign life insurance subsidiaries.
The transaction, known as a debt-for-equity swap, takes some pressure off A.I.G., which was at risk of a downgrade in its credit rating if the deal had not been completed, Mary Williams Walsh writes in The New York Times.
It also reduces the New York Fed’s risk of not being repaid for its bailout assistance because of the continuing troubles at A.I.G. by giving it first claim to the proceeds from the sale of two of the company’s profitable and largely independent businesses.
The remaining $17 billion in principal from the Fed’s original rescue loan to A.I.G. is secured by the general assets of the company, and other creditors could lay claim to those assets.
Months in the making, the transaction does little, however, to reassure American taxpayers that they will be repaid for their full bailout of A.I.G. After the repeated government restructurings, the United States Treasury is the rescuer with the biggest investment in A.I.G. It has extended $70 billion, receiving in exchange preferred stock that does not pay dividends. The Treasury does not have any claims on specific assets and cannot force A.I.G. to repurchase the preferred stock for five years. The company has drawn $44 billion of the $70 billion so far.
The company’s value remains unclear. The insurer’s early bailout plans to sell many of its assets and restructure itself around the property and casualty business have moved at a creep, dozens of executives have resigned and questions have been raised about the adequacy of its insurance reserves.
A.I.G.’s chief executive, Robert H. Benmosche, said in a statement that the reduction of the company’s debt to the New York Fed “sends a clear message to taxpayers: A.I.G. continues to make good on its commitment to pay the American people back.”
Mr. Benmosche also told investors that the early cancellation of the debt would require the company to take a $5.7 billion charge to income in the fourth quarter.
He said that even when the company had repaid all its debt to the New York Fed, the Fed would hold a stake of nearly 80 percent of A.I.G. in a trust. The Treasury is the sole beneficiary of that trust.
In exchange for canceling $16 billion of debt, the New York Fed received a stake in American International Assurance Company, which is based in Bermuda but does most of its business in Asia.
And for canceling an additional $9 billion of debt, the New York Fed received a stake in the American Life Insurance Company, which is based in Delaware. That company does most of its business in Japan and Britain but also has operations in Latin America and the Middle East.
The Fed can cash out its stakes, held in a trust, when the two subsidiaries are sold, something A.I.G. has been trying to do for more than a year. Because offers have been low for the units, Mr. Benmosche has said that he would rather wait and sell them at a higher price later. The New York Fed is entitled to the first $25 billion of proceeds from any sale.
The Fed appears to be trying to secure all its loans. It recently announced that it had secured a smaller loan to A.I.G. with aircraft associated with its airplane leasing business.
A.I.G. began looking for ways to reduce its debt to the New York Fed last winter, when it was preparing to report the biggest losses in corporate history. The losses for 2008 would have reduced its capital so much, relative to its towering debt to the New York Fed, that the company’s credit could have been downgraded by as much as seven notches.
A big downgrade at that point would have been a death blow. It would have prompted costly cash calls and termination clauses in A.I.G.’s derivatives contracts. And it would have made it nearly impossible for A.I.G. to sell insurance, because buyers want to deal with strong companies.
To forestall the downgrades, in March, A.I.G. announced the plan for debt-for-equity swaps with the New York Fed. It took eight months to obtain all of the necessary approvals from foreign regulators responsible for the subsidiaries. Shares of A.I.G. rose $2.44, or 8.6 percent, to close at $30.84 on Tuesday.
The New York Times
