Nov. 12 (Bloomberg) -- American International Group Inc. has been unable to wean itself from the expiring U.S. commercial paper program as firms including MetLife Inc. and General Electric Co. reduce their use of government-backed funds.

AIG owes $5.8 billion, or more than half of the $10 billion in debt outstanding in the Commercial Paper Funding Facility, the New York-based insurer said last week in a regulatory filing. Lending through the Federal Reserve program fell from as much as $350 billion in January as companies found private- sector alternatives or scaled back short-term borrowing.

“AIG remains more dependent on government financing than we would like them to be,” said Clark Troy, a senior analyst based in Chapel Hill, North Carolina for Aite Group, a research firm. “It is more money to repay, and I don’t know if the taxpayer will be made entirely whole.”

The insurer, which has been locked out of traditional sources of liquidity since its bailout last year, said it may “borrow additional funds” from its five-year Fed credit line to make payments on the $5.8 billion in paper that matures in January. The insurer will take “into account availability of other sources of funding,” AIG said in the filing, without naming the alternatives.

AIG’s balance on the Fed credit line surged to about $45 billion last month, the most since May, as it repaid $4.9 billion in expiring U.S. commercial paper. Christina Pretto, an AIG spokeswoman, declined to comment.

‘A Little Scary’

Commercial paper is used by companies to finance daily expenses such as payroll and rent. The Fed, which started a program in October 2008 to bolster the market after the Lehman Brothers Holdings Inc. bankruptcy, said it may wind down the program in February.

Lending to AIG is “a little scary” for private investors, said Adolfo Laurenti, a deputy chief economist at Mesirow Financial Inc. in Chicago. The insurer posted almost $100 billion in net losses in 2008 on bad bets tied to housing markets, before returning to profit this year.

“If you want to issue and be a player in the commercial paper market right now, you either have to be super good quality or you’re out,” Laurenti said. “There’s only liquidity for the high-quality stuff.”

The Fed facility, which only buys top-rated debt maturing in 90 days, charged companies 3.15 percent for asset-backed commercial paper, 2.89 percentage points more than investors on average get in the open market, according to central bank data this week.

Maturing Debt

AIG pays 3 percent annual interest plus the 3-month London interbank offered rate, or Libor, on money it draws on its Fed credit line. Libor, a borrowing benchmark, was set at 0.27 percent today.

AIG said that it will need to repay $23.2 billion in maturing debt, excluding commercial paper, in the four quarters ending September 2010. The insurer said it will make the payments with revenue from its businesses, proceeds of asset sales, dividends from subsidiaries and the Fed credit line.

MetLife, the largest U.S. life insurer, had no borrowing through the commercial paper program at the end of the third quarter, compared with $1.65 billion on Dec. 31. GE, which competes against AIG in the plane-leasing business, used the program in the fourth quarter of 2008, and didn’t expect to tap it again, the Fairfield, Connecticut based company said in a filing.

Planes, Mortgages

The Fed may have urged AIG to stop using the CPFF as part of the central bank’s effort to wind down the program, said Peter Crane, president of Crane Data LLC, a money-fund tracking firm in Westborough, Massachusetts.

AIG has tapped a separate Treasury Department facility for $4.2 billion to help restructure its money-losing mortgage guarantor and the plane unit it’s trying to sell, the insurer said last week. AIG accessed about $2.1 billion from its Treasury program on Aug. 13 and said on Nov. 6 it would draw down another $2.1 billion. AIG got the $29.8 billion facility in April as part of its fourth bailout.

The company will pay down its Fed debts by $25 billion by handing over stakes in its two biggest non-U.S. life insurance units. The transactions, to be completed by year-end, will cause a pretax charge of $5 billion in the fourth quarter. AIG will also book a $1.4 billion after-tax charge in the quarter on the sale of a Taiwan life unit.

The insurer’s $182.3 billion rescue includes a $60 billion Fed credit line, a Treasury investment of as much as $69.8 billion, and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: November 12, 2009 10:46 EST