AIG Takes 85 Billion Fed Loan, Agrees to be Nationalized

AIG signs up for $85 billion Fed loan
By Alistair Barr,
MarketWatch
1:25 p.m. EDT Sept. 24, 2008

Insurer effectively 'nationalized' after failing to raise capital in private market

SAN FRANCISCO (MarketWatch) -- American International Group shares fell more than 10%on Wednesday after the giant insurer agreed to be effectively nationalized late Tuesday.

AIG narrowly avoided bankruptcy last week after the Federal Reserve stepped in with a massive bailout.

Some big AIG shareholders have reportedly been trying to raise capital in private markets to avoid the government seizing control of the company.

But late Tuesday AIG said it signed a definitive agreement with the Federal Reserve Bank of New York for a two-year, $85 billion revolving credit facility.

As part of the deal, AIG will issue a series of Convertible Participating Serial Preferred Stock to a trust that will hold the new securities for the benefit of the Treasury. The Preferred Stock will get almost 80% of any dividends paid on AIG's common stock and will give the government almost 80% of the voting power. The securities will then be converted to common stock at a special shareholder meeting, AIG said.

The agreement leaves "AIG essentially nationalized," Bijan Moazami, an analyst at Friedman, Billings, Ramsey, wrote in a note to investors on Wednesday. "Shareholder efforts to prevent the government from taking an equity stake in AIG will prove fruitless."

Indeed, AIG's new chief executive Edward Liddy said the company made an "exhaustive effort" to borrow money in the private market, but failed.

"This facility was the company's best alternative," Liddy added in a statement late Tuesday
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AIG shares dropped 13% to $4.36 during afternoon trading on Wednesday.

Asset sales, dilution

Liddy said AIG is developing a plan to sell assets and use the proceeds to repay the government loan, hopefully emerging later as a smaller but profitable company.

FBR's Moazami expects AIG to borrow all the $85 billion immediately, partly because the company will have to pay hefty fees and interest on the money it doesn't use. The agreement with the Fed requires the insurer to pay an annual interest rate of 8.5% on the money it doesn't borrow from the loan facility.

AIG has to pay back the $85 billion from the proceeds of certain asset sales and the issuances of new debt and equity, the company said.

AIG has "little to no" capacity to borrow more money in private markets, so if it has to raise capital to repay the Fed the insurer will probably have to sell more common shares, diluting current investors even more, Moazami warned