American International Group (AIG) will more than halve its debt to the US Federal Reserve with the US$35.5 billion sale of American International Assurance (AIA) to Prudential.
The troubled insurer, which survived the 2008 credit crunch with a US$182.3 billion bailout from taxpayers, said that it would use the US$25 billion cash component of the purchase price to immediately pay off a large chunk of its US$48 billion borrowing from the Federal Reserve Bank of New York (FRBNY).
AIG plans to sell the US$10.5 billion in Pru equity, equity-linked securities and preference shares it will get from the deal as soon as the lock-up period ended, and use the money raised to make further repayments to the Fed. It did not specify the terms of the lock-up.
The AIA sale dwarfs other disposals made by the insurer in order to repay its debt to the US Government, including the US$2.1 billion sale of Nan Shan, its Taiwanese life insurer, and the US$1.9 billion sale of 21st Century Insurance Group, a US auto insurer.
If a deal goes through to sell another prized asset, American Life Insurance Company (Alico), for as much as US$15 billion, AIG will be halfway to its target of paying off nearly $100 billion of the money it borrowed from taxpayers.
AIG has drawn down about US$130 billion of the US$182.3 billion the Government set aside for its bailout, including almost $48 billion from the FRBNY and US$47.3 billion from the Treasury.
Robert Benmosche, AIG’s new chief executive, has vowed to repay about US$97 billion of the US$130 billion debt as quickly as possible.
Last June the insurer put AIA and Alico, a Delaware-based life insurance business, into special purpose vehicles (SPVs), with the intention of selling or floating the companies when the market improved.
The FRBNY received preference shares in the SPVs worth about US$25 billion. AIG also has a US$23.4 billion credit line outstanding with the FRBNY.
AIG said that US$16 billion of the US$25 billion raised from the AIA sale would repay the FRBNY for the value of its stake in AIA’s SPV, leaving just US$9 billion that will be repaid when Alico is sold.
The remaining US$9 billion cash from the AIA deal will reduce the insurer’s credit line with the FRBNY to about US$14.4 billion.
