Fed Said to Plan Reining in AIG's Credit Line by $3.6 Billion

The Federal Reserve plans to cut American International Group Inc.’s credit line by about $3.6 billion in a sign of confidence the insurer can reduce reliance on taxpayer funds, said a person with knowledge of the proposal.

Under terms of AIG’s 2008 rescue, paying down the line was supposed to lower the amount of credit available. The Fed gave an exemption in 2009 on $3.6 billion in proceeds from asset sales and has decided this year that the relief may no longer be necessary, said the person, who declined to be identified because the plan isn’t public. AIG had $13.3 billion in credit remaining on the line as of June 30.

“This means there’s little anticipation AIG will need the credit,” said Clark Troy, a senior analyst based in Chapel Hill, North Carolina, for Aite Group, a research firm. “It’s a step in the right direction in terms of making AIG less dependent on federal aid.”

Chief Executive Officer Robert Benmosche said this month he is in talks with U.S. regulators to return AIG to independence and expects to make “meaningful progress” in repaying the credit line this year. The insurer owed about $21 billion on the credit line, it said today in a statement, compared with about $27 billion at the end of April, according to Fed data.

AIG may sell bonds for the first time since its 2008 government rescue to help repay its $182.3 billion bailout package, according to an Aug. 9 filing.

Accounting Charge

Reducing the credit line by $3.6 billion may trigger a $600 million accounting charge, New York-based AIG said this month in a filing. A similar writedown fueled AIG’s $8.87 billion net loss in the fourth quarter of 2009. Mark Herr, an AIG spokesman, and Deborah Kilroe of the Federal Reserve Bank of New York declined to comment.

AIG had to tap government aid last year to prop up subsidiaries after the company lost access to credit markets. Plane-leasing unit International Lease Finance Corp. borrowed $1.7 billion in March of 2009 and $2 billion in October after AIG drew funds from the credit line.

ILFC has since regained access to outside funding, raising about $4.4 billion this month in secured and unsecured notes. The subsidiary used most of the proceeds to repay $3.9 billion in loans from the Fed, Los Angeles-based ILFC said today in a statement. The repayment will trigger a $650 million pretax accounting charge for AIG and free about $10 billion in ILFC collateral that was pledged to the Fed, the unit said.

“ILFC has demonstrated today further progress in stabilizing its finances,” Benmosche, 66, said in the AIG statement. “We are starting to see light at the end of the tunnel.”

Funds Available

Funds available on the credit line shrank by about $4 billion after proceeds from the ILFC bond sales were applied to the Fed debts, AIG said in its statement. Potential bond issuances from the parent company would also scale back the facility, said the person.

AIG, once the world’s largest insurer, was first rescued in September 2008 by the Fed. After three revisions, the firm’s rescue includes a $60 billion Fed credit line and a Treasury investment of as much as $69.8 billion. The Fed also agreed to pay up to $52.5 billion to buy mortgage-linked assets owned or backed by AIG. The insurer turned over a stake of almost 80 percent to the U.S. in exchange for the bailout.

AIG owed more than $45 billion on the credit line before being allowed in last year’s fourth quarter to lower that sum by $25 billion in anticipation of the eventual divestiture of stakes in two non-U.S. life units. The company also owes about $49 billion to the Treasury Department.

Repaying Taxpayers

AIG must demonstrate it can raise money, sell assets and boost insurance profits before it can repay taxpayers, Treasury Chief Restructuring Officer Jim Millstein said at a May hearing of the Congressional Oversight Panel.

“The company will have to demonstrate independent access to the capital markets and secure standby lines of credit,” Millstein said.

AIG’s core insurance units produced $4.4 billion in operating profit in the first six months of this year.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.