American International Group, Inc. (AIG) said it has penned an agreement with the Federal Reserve Bank of New York (FRBNY) that will reduce the debt AIG owes the FRBNY by $25 billion and position two of the company’s international life insurance franchises for initial public offerings, depending on market conditions.
The insurers being readied for the IPO are American International Assurance Co. Ltd. (AIA) and American Life Insurance Co. (ALICO).
AIG previously tried to sell AIA privately but did not attract a buyer.
According to AIG, under the agreement, AIG will contribute the equity of each of AIA and ALICO to separate special purpose vehicles (SPVs) in exchange for preferred and common interests in the SPVs. The FRBNY will receive preferred interests in the AIA SPV of $16 billion and in the ALICO SPV of $9 billion.
The face value of the preferred interests represents a percentage of the estimated fair market value of AIA and ALICO. AIG said it will hold the common interests in the AIA and ALICO SPVs and will benefit from the fair market value of AIA and ALICO in excess of the value of the preferred interests as the SPVs monetize their stakes in these companies in the future.
Taken together, upon closing, the transactions will result in a reduction in the debt owed by AIG under the FRBNY credit facility and the line available to AIG by $25 billion. As of today, AIG’s outstanding balance under the FRBNY credit facility is approximately $40 billion.
AIG expects these transactions to close in the second half of 2009.
Until their separation as independent companies, AIG said AIA and ALICO will remain wholly owned subsidiaries of AIG, consolidated in AIG’s reported financial statements.
“Placing AIA and ALICO into SPVs represents a major step toward repaying taxpayers and preserving the value of AIA and ALICO, two terrific life insurance businesses with great futures,” said Edward Liddy, chairman and chief executive officer, AIG. “Operating AIA’s and ALICO’s successful business models in the SPV format will enhance the value of these franchises as we move forward with our global restructuring.”
The FRBNY said in a statement that the agreements further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company’s global restructuring process.
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