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?It gives us the financial flexibility to complete our restructuring ?This gives us a durable capital structure, both now and in the future,? said AIG Chairman Edward Liddy said during a conference call with equity analysts.
The new plan greatly reduces the interest AIG (NYSE: AIG | Quote | Chart | News | PowerRating) will pay for federal loans and extends the term to five years from two, and it establishes two entities that will allow the company to cap its losses on its two most serious financial wounds ? multisector credit default swaps and AIG?s securities lending program.
?The plan creates a durable financial structure for AIG? with reduced debt and ?gives us some financial breathing room,? Liddy said.
?Investors should realize that this will be a process of several years,? Liddy said, and in part depends on stabilization in global credit markets. ?Our partners and customers can confidently continue to place business with us.?
Celent senior analyst Donald Light said the most "onerous" terms of the first bailout are gone. ?This one is designed much more surgically to address the really big problems they have, both the credit default swaps that AIG wrote and the ill-fated securities lending program. This gives them a much stronger and better-designed lifeline than the first version.?
Liddy said AIG?s ultimate goal is unchanged ? to sell off assets to repay the federal aid and stabilize its finances, restructuring the company around its core insurance businesses. Liddy has said AIG will sell life insurance operations in the United States, Europe and Japan, along with the firm's reinsurer, airplane lessor, consumer finance unit and asset manager.
?We expect to announce several key divestitures this year, proving good deals can be done even in the current market,? Liddy said. ?We will not share a schedule of divestitures. ? We?re probably dealing with 75, north of 100 people. These are complex transactions.
?It?s not just somebody coming to you saying. ?Here my price.? It?s a thoughtful, disciplined process,? he said. ?We will do the right thing, the right way.?
The revamped bailout agreement, reached with the U.S. Treasury and Federal Reserve, establishes a roughly $150 billion program that involves the creation of two financing entities capitalized by loans from AIG and the Federal Reserve Bank of New York. The entities will buy assets related to AIG's U.S. securities lending program and multisector collateralized debt obligations on which AIG has written credit default swap contracts.
According to AIG, the entities will collect cash flows from the assets and pay interest on the debt. The New York Federal Reserve and AIG will share any recoveries in the market prices of the assets.
AIG had originally entered an $85 billion two-year credit facility with the New York Federal Reserve, along with a separate $37.8 billion securities lending program facility (BestWire, Oct. 8, 2008).
The interest rate charged to AIG on the original $85 billion loan facility will be reduced to the London Interbank Offered Rate plus 3%, from the original LIBOR plus 8.5% terms. Also, fees on undrawn commitments will be cut to 0.75% from the current 8.5%.
?Clearly, these terms were not sustainable,? Liddy said of the $85 billion loan facility.
AIG?s problems in its securities lending problem stem from the fact the company invested much of the collateral it received on the loans in residential mortgage-backed securities, for which there is no market and which have declined sharply in value as AIG is forced to return cash to counterparties.
Under the plan, AIG will transfer those securities to the financing entity that will be capitalized with $1 billion in subordinated funding from AIG, and senior funding from the New York Federal Reserve up to $22.5 billion. AIG?s losses are capped as those already incurred plus the $1 billion.
AIG?s multisector credit default swaps were written to cover mortgage-backed collateralized debt obligations, which have been hit by significant write-downs and required the posting of cash collateral. The new facility, funded with $30 billion from the Federal Reserve and $5 billion from AIG, will buy up the CDOs.
?They are buying the CDOs, at whatever the negotiated price is, and the credit default swap contract will be torn up,? said David Herzog, executive vice president and chief financial officer.
?Of the $61 million drawn down (against the $85 billion facility), $53 billion to $55 billion is related to posting collateral on credit default swaps,? said Herzog ?We need to stop that. That?s what this is designed to do.?
However, equity analysts noted that the plan calls for purchasing about $70 billion of CDOs with about $35 billion in funding, indicating holders of those securities are expected to settle for about 50 cents on the dollar.
AIG's third-quarter results reflected net realized capital losses of $15.1 billion, compared with net losses of $600 million a year ago. AIG also recorded $1.39 billion in pretax catastrophe losses for the quarter.
A.M. Best Co. has affirmed the financial strength ratings and issuer credit ratings of the insurance subsidiaries of American International Group Inc., removed them from under review and assigned them a negative outlook. Most currently have a Best's Financial Strength Rating of A (Excellent). In addition, A.M. Best has affirmed the issuer credit rating of bbb of AIG.
A.M. Best?s removal of the ratings from under review reflects the protracted time frame necessary for an orderly sale of AIG?s assets, which exceeds the usual near term time frame incorporated in an under review status. According to A.M. Best, the issues affecting these ratings continue to be reviewed as they change or emerge, and the ratings could be downgraded at any time if events do not meet expectations. Alternatively, the sale of a business to a higher rated organization could result in an upgrade to the business sold.
A.M. Best?s rating affirmations are heavily based on the U.S. Government?s intervention and provision of immense capital levels partially without recourse to AIG. All of A.M. Best?s future rating considerations are based on continued U.S. Government support as long as support is needed.
Shares of AIG were selling at $2.43 in morning trading on Nov. 10, up 14.9% from the previous close.
(By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com)
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