AIG Agrees to Retire $21 Billion Fed Credit Line in Wind-Down of Bailout

American International Group Inc. struck a deal to repay the Federal Reserve, the regulator that first bailed out the insurer in 2008, and then focus on retiring obligations to the U.S. Treasury Department.

“It represents a great step forward for AIG and for the taxpayers to effectively narrow the number of counterparties from two to one,” said Clark Troy, senior analyst at Aite Group in Chapel Hill, North Carolina. “We’ve had a number of steps in a row in AIG’s recovery process go off without a hitch.”

AIG will use proceeds from the sales of two non-U.S. life insurers to repay the line, on which it owed about $21 billion as of last week, the company said yesterday. Chief Executive Officer Robert Benmosche is focusing on global property-casualty coverage and domestic life and retirement units to entice private investors to replace the government capital that propped up the firm after losses tied to subprime home loans.

Treasury, which invested about $49 billion in New York- based AIG, plans to convert its preferred stake into 1.66 billion shares of common stock, or 92 percent of the total, by March 15. The securities will then be sold to private investors.

Treasury expects underwriters to be selected by early next year for an offering of some of its stake, and will determine how many shares to sell based on market conditions, according to a person familiar with the plan. The person, who declined to be identified because the plan is private, said it’s too early to estimate how much stock would be sold in the first offering.

Photographer: Daniel Acker/Bloomberg

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Photographer: Daniel Acker/Bloomberg

A flag flies outside 70 Pine Street, home to the headquarters of American International Group (AIG), in New York.

‘Selling Into Strength’

The insurer had gained about 41 percent this year through yesterday on the New York Stock Exchange to $42.22. The Treasury investment will break even if shares are sold at about $29 each.

AIG may raise as much as $3 billion in a share sale, under the deal. The insurer last month sold $2 billion of bonds in its first offering since the bailout.

Improving results at operating units will attract private capital, said Robert Haines, an analyst at CreditSights Inc. in New York. Earnings from insurance operations that AIG intends to keep exceeded $4 billion in the six months ended Sept. 30.

“They’ll be selling into strength, and where they’re selling into strength they’ll be moving a lot of stock,” Haines said. “There’s a lot of interest in AIG again.”

The U.S. is selling holdings in financial firms that taxpayers bailed out at the depths of the credit crisis. The Treasury this week divested its remaining stock in Citigroup Inc. for $10.5 billion and recorded a profit of about $12 billion from that bank’s bailout, including share appreciation, dividends and gains from other securities.

‘Utter Collapse’

Treasury aims to raise at least $15 billion from an offering of AIG shares in the first quarter of next year, the Wall Street Journal said, citing unidentified people.

AIG’s Fed credit line, originally $85 billion, was created in 2008 to avoid a failure of the company and what Treasury Secretary Timothy F. Geithner has said would have been an “utter collapse” of the economy. AIG said it will take a charge of about $4.7 billion tied to the close of the line.

The bailout swelled to $182.3 billion as it was revised at least four times to make more funds available, lower interest payments and to give the company additional time to sell assets. AIG divested a majority stake in AIA Group Ltd. in October for $20.5 billion and sold American Life Insurance Co. last month to MetLife Inc. for $16.2 billion.

Insuring Trustees

As part of a deal announced in September, AIG may draw additional funds from the Treasury to help retire Fed obligations. If necessary, AIG may repay taxpayers with proceeds from sales of its Taiwan unit, plane-leasing business and two Japan units it agreed to sell to Prudential Financial Inc.

The trust of overseers appointed to manage the government stake will be terminated as part of the reorganization, and AIG agreed to provide $250 million in insurance coverage to protect the trustees against any claims that they failed to uphold their duties. Treasury will have control over equity offerings until its stake falls below 33 percent.

The plan announced in September also includes a new $2 billion backstop from Treasury after credit raters said the company may need access to emergency capital as it regains independence.

Yesterday’s agreement is a “milestone in the government’s long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers,” said Tim Massad, acting assistant secretary for financial stability, in a statement.  “We believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit.”

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Rebecca Christie in Washington at rchristie4@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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