AIG to Borrow from Treasury as Part of Exit Plan

The U.S. government and American International Group Inc. (NYSE: AIG) on Wednesday announced a deal to accelerate repayment of taxpayer dollars and clear the road for the company to reclaim its independence.

Terms of the arrangement, which were outlined in September, call for the company to borrow funds from the Treasury Department to repay the remainder of its debt owed to the Federal Reserve, leaving the Treasury holding the bulk of the beleaguered company's common stock.

Once the world's largest insurer, AIG received more than $180 billion of bailout funds from the government to help cover investments that vanished during the collapse of the U.S. real estate bubble.

The "definitive recapitalization agreement" signed by AIG "marks an important step forward in our progress toward completely repaying taxpayers," the company said in a statement.

Under the recapitalization plan, AIG "will have the right to raise up to $3 billion [and up to an additional four billion dollars with the consent of the Treasury Department] by August 15, 2011," AIG said in a filing with the U.S. Securities and Exchange Commission (SEC).

The restructured deal also spells out the rights the Treasury Department will have under the accelerated exit plan as it begins to sell off its controlling stake in the giant insurer.

"Today's announcement is a milestone in the government's long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers," Tim Massad, acting assistant secretary for financial stability, said in a statement. "When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."

The Treasury is aiming to sell at least $15 billion of its shares in the insurer in the first of a series of stock offerings starting in the first quarter of 2011, people familiar with the matter told The Wall Street Journal.

The $15 billion share sale represents roughly 25% of the government's stake, given AIG's current stock price.  The government currently owns 79.8% of the company and is expected to increase its stake to 92.1% by converting preferred shares it owns into AIG common stock.

The plan will then revert to a careful balancing act as the government unloads an additional $60 billion in AIG stock over the next two years, hopefully without destabilizing the company and driving down the share price.

While Treasury wants to exit its ownership as quickly as possible, the agreement will allow the company only the limited ability to sell shares to maintain its capital position or that of its insurance units.

The government will have complete control over the terms, conditions and pricing of any sale in which it participates, including any primary offering by AIG until the Treasury Department's ownership of AIG's voting securities falls below 33%.

Although AIG has the right to conduct two primary offerings per year, the Treasury Department may decide to participate in those offerings, and to prevent AIG from selling any stock into the market, according to The Journal.

The actual size of AIG's offerings will depend on investor demand for the stock, which the company hopes to buttress with a series of investor presentations in the coming months, anonymous sources told The Journal.

AIG also must retire $20 billion in secured debt to the Federal Reserve Bank of New York and transfer other obligations from the New York Fed to the U.S. Treasury. The Treasury sales won't happen until the two sides have worked out an agreement for those transactions.

The government can compel AIG to sell shares it holds in two companies: AIA Group Ltd and MetLife Inc. (NYSE: MET).  AIG owns a portion of AIA, an Asian life insurer, after spinning the company off to help repay its debt. AIG got the MetLife stock when it sold another unit to MetLife.

AIG recently issued its first bonds in more than two years as part of an effort to line up $11 billion to $12 billion in "actual and contingent" liquidity to support it after its debt from the New York Fed is retired, Moody's Investors Service (NYSE: MCO) said.

AIG was the biggest recipient of government aid during the financial crisis and has been a lightning rod for critics who have questioned the government's decision to save it through the Troubled Asset Relief Program (TARP).

A Congressional Budget Office report in March said AIG's ability to repay the bailout funds is an open question and that as much as $36 billion in assistance provided to the company since the start of the financial crisis may never be repaid.

"When AIG will be able to pay the government completely back for its assistance is currently unknown because the federal government's exposure to AIG is increasingly tied to the future health of AIG, its restructuring efforts, and its ongoing performance as more debt is exchanged for equity," the report said.

The Congressional Oversight Panel, created to oversee TARP, said in June that it is unclear if AIG can generate enough value for shareholders to ensure the U.S. government gets repaid in full, concluding that taxpayers "remain at risk for severe losses."

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