US government restructures AIG debt

The U.S. government has significantly restructured its financial support to American International Group (AIG), making it somewhat easier for the company to pay off a credit facility that prevented the insurer from going bankrupt in September 2008.
As part of the new terms, the U.S. Treasury announced that it will purchase US$40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program.
The purchase allows the Federal Reserve to reduce from US$85 billion to US$60 billion the total amount available to AIG under the credit facility established by the Federal Reserve Bank of New York on Sept. 16, 2008.
The Federal Reserve also lowered the interest rate on this credit facility and extended its life from two to five years.
“These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers,” the Reserve Board notes.
In addition, two new lending facilities are being established to alleviate capital and liquidity pressures on AIG.
In one facility, AIG will transfer residential mortgage-backed securities (RMBS) from its securities lending collateral portfolio to a newly-created financing entity. The new entity will be capitalized with US$1 billion in subordinated funding from AIG, as well as senior funding from the New York Fed up to a maximum of US$22.5 billion.
A second created financing entity will purchase roughly US$70-billion worth of multi-sector collateralized debt obligations (CDOs) exposure on which AIG has written credit default swap (CDS) contracts.
The New York Fed will provide up to US$30 billion in senior funding to the second financing entity and AIG will provide up to US$5 billion in subordinated funding.