AIG, U.S. Repayment Talks Advancing, Sources Say

American International Group Inc.’s talks with the U.S. Treasury Department over repayment of bailout funds have advanced past initial discussions, a source familiar with the matter said.

A possible conversion of the Treasury’s $49 billion preferred stake in AIG into common stock is one of the options being discussed, the source said Tuesday.

Such a conversion, which could start as soon as the first half of next year, would possibly raise the government’s stake in AIG to above 90 percent from nearly 80 percent, another source said. The Treasury would sell its common stake to investors over time.

The idea is still under discussion and the parties have not agreed on a concrete plan, which would also be contingent on the Federal Reserve Bank of New York getting paid back first, the second source said.

But the news, which The Wall Street Journal first reported, shows AIG is making progress in paying back the U.S. government, which rescued the insurer from near collapse two years ago at the height of the financial crisis.

An eventual exit by the Treasury would also depend on AIG getting an appropriate rating once it is on its own. Chief Executive Robert Benmosche has said AIG would have to achieve investment grade rating for such a plan to work.

“Our objectives remain the same: to repay taxpayers and position AIG over time as a strong, independent company worthy of investor confidence,” an AIG spokeswoman said.

Treasury wasn’t immediately available for comment. The sources declined to be named because the talks are not public.

AIG, which received a $182.3 billion U.S. rescue package after being bailed out two years ago, owes the Fed about $21 billion under a credit facility. The Fed also owns $25 billion worth of preferred interest in two of AIG’s foreign life insurance units that must be monetized.

The company expects a big part of that money to come in by the end of the year as it closes on the sale of American Life Insurance Co to MetLife Inc for $15.5 billion and lists American International Assurance (AIA) in Hong Kong.

AIA, which is planning an estimated $15 billion IPO next month in Hong Kong, named insurance industry veteran Marc de Cure as chief financial officer, sources told Reuters, marking a critical step before the listing.

Last month, Benmosche told Reuters that AIG would begin negotiating an exit of the Treasury’s equity stake once it clarified how the Fed’s credit facility would be paid down.

Converting the Treasury’s preferred stake into common shares has been seen as an option to end the government role in the insurer.

In March, a source told Reuters such a strategy would increase Treasury’s equity in the insurer above its current 80 percent stake until the department could sell the shares.

AIG shares were off 2.4 percent at $36.05 in afternoon trading on the New York Stock Exchange.