AIG to repay US government

American International Group (AIG) has entered an agreement with the US Treasury, the Federal Reserve Bank of New York (FRBNY) and the AIG Credit Facility Trust (the Trust) to repay all its obligations to US taxpayers following the US government’s bail-out of the firm in 2008.

The payback plan has three key components. The first is repaying and terminating the FRBNY credit facility, under which AIG owes $20bn in senior secured debt. AIG intends to repay the entire amount with its own resources plus the proceeds from selling various units, including American International Assurance Company (AIA) and American Life Insurance Company (ALICO).

The second is facilitating the US government’s exit from interests it owns in two AIG special-purpose vehicles. FRBNY owns a $26bn stake in the SPVs. AIG plans to draw down $22bn of funds available to it under the Troubled Asset Relief Program (TARP) to buy most of FRBNY’s interest, and will use proceeds from sales of units, including AIG Star Life Insurance and AIG Edison Life Insurance, to retire the remainder. To settle the Treasury’s stake in the vehicles, AIG will apply the proceeds of future sales, including its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife closes.

The third is retiring the remaining TARP support and series C preferred shares. AIG will give the Treasury 1.655 billion shares of AIG common stock in exchange for the $49.1 billion of TARP series E and Series F preferred shares and the series C preferred shares currently held by the AIG Credit Facility Trust. In addition, AIG will issue up to 75 million warrants with a strike price of $45.00 per share to existing common shareholders. Upon the exchange, the Treasury will own 92.1% of the common stock of AIG ,which AIG expects the Treasury will sell on the open market.

AIG expects to repay and terminate the FRBNY credit facility and complete the issuance of common stock to the Treasury before the end of the first quarter of 2011, subject to regulatory approvals and other closing conditions.