Today, American International Group (AIG) along with the U.S. Treasury and Federal Reserve, separately announced "a broad set of actions," including an infusion of $30 billion of new capital, to restructure the government's assistance to AIG "in order to stabilize this systemically important company in a manner that best protects the US taxpayer." These actions by the Treasury and Federal Reserve come on the same day that AIG reported that "[c]ontinued severe credit market deterioration and charges related to ongoing restructuring activities contributed to a record net loss of $61.7 billion for the fourth quarter of 2008.” However, the concerted response by the federal government and AIG will "reduce the debt AIG owes the government, strengthen AIG’s capital base, and allow AIG time to execute its plan and benefit from future improvements in market and industry conditions.” Notwithtanding these measures, Treasury and the Federal Reserve did not rule out the possiblity that AIG might need even more assistance if conditions worsen.
The key elements of "[o]ne of the most extensive corporate restructuring programs in history" include the following:
- Improving the terms of U.S. Treasury's existing preferred investment - The terms of the U.S. Treasury’s $40 billion preferred stock investment in AIG will be modified by exchanging Treasury’s existing Series D Fixed Rate Cumulative Perpetual Preferred Stock for an equivalent number of shares of a new Series E Preferred Fixed Rate Non-Cumulative Perpetual Preferred Stock (Series E Preferred). A summary of the Series F Preferred term sheet is as follows:
- Dividends - Payable on Series E Preferred quarterly in cash at a rate of 10% per year, on a non-cumulative basis, but only if declared by AIG. Dividends on the former Series D Preferred were cumulative.
- Election of Directors - Upon non-payment of dividends, in full, for four dividend periods, whether or not consecutive, Series E Preferred stockholder shall have the right to elect the greater of (i) two directors or (ii) 20% of the Board of Directors.
- Replacement Capital Covenant - AIG will enter into a replacement capital covenant in favor of covered debt holders pursuant to which AIG will not, prior to the third anniversary of the issuance of the Series E Preferred, repay, redeem or repurchase (and will not permit any subsidiary to purchase) any Series E Preferred except with the proceeds of a qualifying issuance of replacement capital securities.
- Statement of Intent – Following expiration of the replacement capital covenant on the third anniversary of the issuance of the Series E Preferred, AIG states that it does not intend to repay, redeem or repurchase (or ot permit any subsidiary to purchase) any Series E Preferred except with the proceeds of an issuance of securities for which AIG will receive rating agency equity credit, at the time of sale or issuance, that is, in the aggregate, equal to or great than the equity credit attributed to the Series E Preferred redeemed at the time of the early redemption.
- Executive Compensation - AIG must comply with Section 111 of the Emergency Economic Stablization Act of 2008, as amended, as implemented by any guidance or regulations issued thereunder, including amendments to the guidelines implementing the Systematically Significant Failing Institutions Program.
- New standby equity capital facility - The U.S. Treasury will provide AIG with a new $30 billion equity capital facility under which AIG may raise capital from time to time as needed by issuing a new Series F non-cumulative referred stock (Series F Preferred) to the U.S. Treasury. A summary of the Series F Preferred term sheet is as follows:
- Term – Treasury’s capital commitment has a 5-year term.
- Warrants - Treasury will receive warrants to purchase AIG common stock equal to 1% the issued and outstanding common stock of AIG on the commencement date of the facility. The initial exercise price of the warrant is $2.50, subject to anti-dilution adjustments, provided that the initial exercise price per share shall be adjusted to the par value per share of AIG common stock following amendments to AIG's Restated Certificate of Incorproation contemplated by the terms of the Series C Perpetual, Convertible, Participating Preferred Stock of AIG.
- Executive Compensation - Same as Series E Preferred above.
- Repayment of the Federal Reserve Bank of New York (FRBNY) credit facility - In order to "tap the value of certain life insurance units" and reduce AIG's outstanding borrowings under its $60 billion secured credit facility with the FRBNY, AIG will transfer to the FRBNY (or to a trust for the benefit of the FRBNY) preferred interests in American Life Insurance Company (ALICO) and American International Assurance Company, Ltd. (AIA) in return for an up to $26 billion reduction in the outstanding balance of the FRBNY credit facility. In this transaction:
- AIG will contribute the equity of each of ALICO and AIA to special purpose vehicles (SPVs) in exchange for preferred and common interests in the SPVs. The FRBNY will then accept preferred interests in the SPVs in repayment of a portion of the outstanding balances under the FRBNY credit facility. AIG will retain the common interests in the SPVs, and will consolidate these entities for accounting purposes, though the FRBNY will have certain governance rights to protect its interests.
- Certain of AIG’s U.S. life insurance businesses will create SPVs that will issue $8.5 billion of embedded value securitization notes to the FRBNY (or a trust for the benefit of the FRBNY) in repayment of a portion of the outstanding balance under the FRBNY credit facility. These notes will be backed by net cash flows from the designated blocks of existing life insurance policies held by these companies.
- Specific amounts and terms for the subsidiary preferred interests and the securitization notes to be accepted in repayment will be determined between AIG and the FRBNY
According to AIG Chairman and CEO Edward Liddy, "[w]e think this structure is the optimal solution to maintain the value of" ALICO and AIA, and "[b]est position them to enhance their franchises.”
- Reduced cost of FRBNY credit facility - The interest rate on the FRBNY credit facility, which is currently three-month LIBOR plus 300 basis points, will be modified by removing the existing 3.5% floor on the LIBOR rate. This will save AIG an estimated $1 billion in interest costs per year, based on the current level of LIBOR and the current facility balance. Following the repayment of the outstanding amount on the facility with the preferred interests and securitization notes, AIG will still have the ability to borrow up to $25 billion under the facility.
- Issuance of Preferred Shares - As required by the credit agreement governing the Revolving Credit Facility, AIG has agreed to issue on March 4, 2009, shares of convertible preferred stock representing an approximately 77.9% equity interest in AIG to an independent trust for the sole benefit of the United States Treasury.
This marks the fourth time the government has stepped in to help AIG. Initially the FRBNY provided an $85 billion credit facility lifeline in September 2008 in exchange for a 79.9 percent equity interest in AIG. Subsequently the FRBNY provided an additional $37.8 billion of liquidity in October 2008, whereby the FRBNY borrowed investment-grade, fixed income securities from certain regulated U.S. insurance subsidiaries of AIG, in exchange for cash collateral. In November 2008, the Fed and US Treasury restructured the previous federal financial support to AIG through the purchase of $40 billion of newly issued AIG preferred shares and lent up to a combined $52.5 billion to establish two new lending facilities to fund (1) the purchase of residential mortgage-backed securities from AIG’s U.S. securities lending collateral portfolio, and (2) the purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. S
eparately, AIG announced today that it intends to form a holding company for its general insurance units, including its Commercial Insurance Group, Foreign General unit, and other property and casualty operations, to be called AIU Holdings, Inc., with a board of directors, management team and brand distinct from AIG. The establishment of AIU Holdings, Inc. will assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions. In conjunction with the actions taken by the Fed and US Treasury involving AILCO and AIA, “[t]he formation of AIU Holdings, Inc. will help protect and enhance the value of these key businesses, and position them for the future as more independently run, transparent companies.”