AIG to halve Fed debt with Asia sale

American International Group (AIG) will more than halve its debt to the
Federal Reserve with the $35.5 billion sale of American International
Assurance (AIA) to Prudential.

The troubled insurer, which survived the 2008 credit crunch with a $182.3
billion bailout from taxpayers, said that it would use the $25 billion cash
component of the purchase price to immediately pay off a large chunk of its
$48 billion borrowing from the Federal Reserve Bank of New York (FRBNY).

AIG plans to sell the $10.5 billion in Pru equity, equity-linked securities
and preference shares it will get from the deal as soon as the lock-up
period ended, and use the money raised to make further repayments to the
Fed. It did not specify the terms of the lock-up.

The AIA sale dwarfs other disposals made by the insurer in order to repay its
debt to the US Government, including the $2.1 billion sale of Nan Shan, its
Taiwanese life insurer, and the $1.9 billion sale of 21st Century Insurance
Group, a US auto insurer.

If a deal goes through to sell another prized asset, American Life Insurance
Company (Alico), for as much as $15 billion, AIG will be halfway to its
target of paying off nearly $100 billion of the money it borrowed from
taxpayers.

AIG has drawn down about $130 billion of the $182.3 billion the Government set
aside for its bailout, including almost $48 billion from the FRBNY and $47.3
billion from the Treasury.

Robert Benmosche, AIG’s new chief executive, has vowed to repay about $97
billion of the $130 billion debt as quickly as possible.

Last June the insurer put AIA and Alico, a Delaware-based life insurance
business, into special purpose vehicles (SPVs), with the intention of
selling or floating the companies when the market improved.

The FRBNY received preference shares in the SPVs worth about $25 billion. AIG
also has a $23.4 billion credit line outstanding with the FRBNY.

AIG said today that $16 billion of the $25 billion raised from the AIA sale
would repay the FRBNY for the value of its stake in AIA’s SPV, leaving just
$9 billion that will be repaid when Alico is sold.

The remaining $9 billion cash from the AIA deal will reduce the insurer’s
credit line with the FRBNY to about $14.4 billion.

Once AIG’s Pru stock holdings are sold, the money will be used to pay off even
more of the credit line, cutting it to near $4 billion.

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