AIG Makes $3.95 Billion Payment to Feds, in Talks to Repay $97.2 Billion More

American International Group Inc. said it's paid $3.95 billion towards its government bailout using proceeds from its subsidiary, International Lease Finance Corp., and is talking with the federal government about repaying the rest of the $97.2 billion it still owes.

The $3.95 billion payment reduces AIG's outstanding balance owed on the Federal Reserve Bank of New York Revolving Credit Facility, a part of the 2008 federal bailout, to about $21.3 billion, which includes $15.3 billion in principal and $6 billion in interest.

Because AIG expects to repay the facility sooner than expected, it anticipates to accelerate the amortization of the loan, which would result in the company posting a $650 million pretax charge. The charge is likely to be posted sometime this year, AIG spokesman Mark Herr said.

The $3.95 billion payment is the single largest cash payment AIG has made to the credit facility and is the largest reduction in the credit facility's principal balance since AIG placed AIA Group Ltd. and American Life Insurance Co. into special purpose vehicles last December, exchanging preferred equity interests in AIA and ALICO for a $25 billion reduction in the balance outstanding on the credit facility.

The payment also reduces the size of the FRBNY credit line available to AIG from about $34 billion to about $30 billion.

AIG's top executive hailed the partial repayment as "tangible evidence of AIG's progress in repaying the American taxpayers."

"AIG is getting stronger every day. We still have more work to do, but we will finish the job and make sure we repay the American taxpayers," AIG President and Chief Executive Officer Robert H. Benmosche said in a written statement. "Our insurance businesses are profitable; client retention rates have stabilized; and surrender rates have improved to normal levels. We are starting to see light at the end of the tunnel."

AIG still owes a total of about $97.2 billion to the federal government, which offered a bailout of up to $182 billion to save the company from failing in 2008. AIG never borrowed the full $182 billion it was offered, and has been selling noncore assets to pay back what it owes.

The FRBNY holds a preferred interest in two special purpose vehicles that hold a $16 billion interest in AIA and a $9 billion interest in Alico. The cash generated when Alico and AIA are monetized will be used to payback those loans, AIG said.

AIG plans to raise $15.5 billion from Alico by selling it to MetLife. AIG had planned to raise cash with AIA by selling it to Prudential plc, but after Prudential backed out of the deal, AIG said it would raise cash with an initial public offering of AIA instead of an outright sale.

"Closing on the ALICO transaction remains on track and we continue to work diligently on the initial public offering for AIA," Benmosche said in a statement.

In addition to the FRBNY credit line, AIG owes the U.S. Department of Treasury $41.6 billion in Series D/E shares and about $7.5 billion in Series F shares. The company has never publically stated how that portion of the bailout will be repaid, however, AIG said it has started discussions government about repaying the total debt.

In a filing with the U.S. Securities and Exchange Commission, the company said it has begun discussions with FRBNY, Treasury and the trustees of the AIG Credit Facility Trust, a trust established for the sole benefit of the U.S. Treasury, about a proposed strategy for AIG to repay what it owes and allow the government to exit its ownership relationship with AIG.

There are two more pieces of the bailout related to AIG, but AIG itself does not carry them on its balance sheet.

As part of the bailout in November 2008, the FRBNY bought two buckets of toxic assets from AIG, and moved them into two special purpose vehicles, Maiden Lane II and III.

Maiden Lane II houses the residential mortgage-backed securities once held by AIG's life insurance companies. The FRBNY loaned Maiden Lane II $19.5 billion to buy the securities. The FRBNY is expected to be repaid with the proceeds from the interest and principal payments -- or liquidation -- of those securities. Maiden Lane II still owes $14.7 billion of that debt, as of June 30, according to AIG.

Also, the FRBNY loaned Maiden Lane III $24.3 billion to purchase collateralized debt obligations from AIG Financial Products Corp.'s counterparties in connection with the termination of credit default swaps and the surrender of collateral by AIGFP. These loans are also to be repaid from the interest and principal payments or from the liquidation of the assets in the facility. Maiden Lane III still owes $16.3 billion of that debt as of June 30, according to AIG.

Earlier this month, AIG agreed to sell an 80% stake in its consumer lending unit, American General Finance, to Fortress Investment Group, in its continuing effort to pay back its government bailout (BestWire, Aug. 12, 2010).

AIG posted a $2.7 billion net loss for the second quarter as a $3.3 billion goodwill impairment charge related to its discontinued operations of American Life Insurance Co. outweighed the income from continuing operations (BestWire, Aug. 6, 2010).

The stock of American International Group (NYSE: AIG) was trading at $35.19 in afternoon trading on Aug. 23, up 0.06% from the previous close. Most AIG insurers have current Best's Financial Strength Ratings of A (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])