American International Group Inc (AIG), the insurer bailed out by the US, could get an expanded government rescue package valued at more than US$150 billion that includes lower interest rates and more time to repay debt.
The US will cut the original US$85 billion loan that saved the New York-based insurer in September to US$60 billion, buy US$40 billion of preferred shares, and purchase US$52.5 billion of mortgage securities owned or backed by AIG, a source familiar with the matter said.
The funds would help AIG retire part of its credit-default swap portfolio and bolster its securities lending operations, said the source, who declined to be identified because the plan has not been officially announced.
The changes may give chief executive officer Edward Liddy more time to salvage AIG, which needed US help to escape bankruptcy after three quarterly losses exceeding US$18 billion.
Liddy’s plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.
“It makes a lot of sense to renegotiate the terms,” Andrew Kligerman, an analyst at UBS AG, said in an interview before the disclosure. By giving AIG more time to sell businesses, the government “has a better opportunity to recover its capital.”
US Federal Reserve spokeswoman Michelle Smith and AIG’s Nicholas Ashooh had declined to comment. AIG was scheduled to disclose third-quarter results yesterday. Terms of the expanded package were reported earlier by the Wall Street Journal.
In addition to the US$85 billion loan on Sept. 16, AIG got two more government credit lines totaling US$58.7 billion last month to make up for more losses, including US$37.8 billion for a securities lending operation.
Now, the two-year, US$85 billion loan AIG received on Sept. 16 will be changed to US$60 billion that AIG must repay in five years, the source said. AIG would pay interest of 3 percent, rather than the 8.5 percent of the original terms, plus the London interbank offered rate, on amounts the firm borrows.
On amounts AIG does not draw down, it would pay interest of 0.75 percent, rather than the 8.5 percent under the earlier agreement, the person said. AIG investors had complained the rates were so high that they almost guaranteed the company would not have a chance to recover.
AIG gets another US$40 billion from the Treasury’s US$700 billion Troubled Asset Relief Program, the person said. In exchange for the cash, the government receives preferred shares that pay 10 percent annual interest.
The US stake in AIG, measured by its common stock, would remain at 79.9 percent.
The new rescue package may fix two AIG operations that continued to drain cash amid the collapse of subprime mortgage markets. In the first, the US will put US$30 billion into a fund that buys the underlying assets of credit-default swaps that AIG sold to investors including banks, the person said, while the insurer will chip in US$5 billion. The fund aims to retire swaps that protect about US$70 billion worth of assets, the person said.
In the second fund, the US will add US$22.5 billion to buy mortgage-related bonds in AIG’s securities-lending portfolio, according to the person. The insurer will put US$1 billion into the facility, the person said.
The insurer lost money on investments made using collateral from securities it loaned to third parties. The US$37.8 billion credit line that the Fed gave AIG last month to support this operation will be terminated, the person said.
The expanded aid to AIG may help stabilize companies that depend on AIG to protect them against debt-market losses.
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