Today, the U.S. Treasury Department and American International Group, Inc. (AIG) announced that they had reached an agreement-in-principle with the Federal Reserve Bank of New York (FRBNY) and the trustees of the AIG Credit Facility Trust regarding the repayment by AIG of funds made available to it by U.S. taxpayers. Nearly two years after the initial rescue of AIG, its President and CEO, Robert H. Benmosche, described the plan as “a pivotal milestone” that lays out “a clear path for AIG to repay [the Federal Reserve Bank of New York] in full” and would “vastly simply current government support.” Treasury Secretary Timothy Geithner agreed, stating that the plan “dramatically accelerates the timeline for AIG’s repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company.”

Of the amounts AIG currently owes the U.S. government, approximately $46 billion would be retired under the plan, leaving approximately $49.1 billion outstanding, though not in its current form. The plan involves three components:

  • Repayment of Credit Facility. AIG expects to repay the approximately $20 billion in senior secured debt under the credit facility provided by the FRBNY, funded using proceeds from AIG and from other proceeds from a variety of asset dispositions, including the initial public offering of American International Assurance Company Ltd. (AIA) and the sale of its foreign life insurance company American Life Insurance Company to MetLife, Inc. (ALICO).
  • Exit from SPVs. The plan also involves drawing down up to $22 billion of unused Series F TARP funds to purchase an equal amount of the FRBNY’s preferred interests in certain special purpose vehicles (SPVs) holding preferred interests in AIA and ALICO. AIG will then immediately transfer these preferred interests to the U.S. Treasury as part of its consideration for the Series F preferred stock. AIG will also apply proceeds from the proposed sales of AIG Star Life Insurance Co. and AIG Edison Life Insurance for $4.8 billion to retire the FRBNY’s remaining preferred SPV interests. In order to retire the interests transferred to the U.S. Treasury as part of this transaction, AIG will apply the proceeds from its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife is completed.
  • Exchange of Preferred Shares. Under the plan, AIG will exchange approximately 1.655 billion shares of AIG common stock for AIG’s approximately $49.1 billion of outstanding TARP preferred shares. AIG also will issue to existing common stockholders up to 75 million warrants with a strike price of $45 per share. The exchange will result in an increase in the U.S. Treasury’s ownership of AIG from 80% to 92.1% and will allow the U.S. government to sell shares in the open market, permitting it to eventually end taxpayer support. The exchange will not occur until the FRBNY credit facility is terminated.

The repayment and termination of the credit facility, and the preferred stock/common stock share exchange, is expected to be completed before the end of the first quarter 2011.