Most news sites, taking their cue from the Fed NY Press Release, are reporting that AIG will be receiving a loan of $85 billion which will be paid back in two years with an interest rate of LIBOR + 850 basis points.
The loan will be collateralized by AIG's assets including its subsidiaries.
In return, the Fed will receive an equity interest of 79.9% of AIG immediately. It will have the right to suspend dividend payments to common and preferred shareholders. It will replace top management.
AND it owns and will maintain ownership of 79.9% of the company AFTER being paid back in full at a 10+% rate of interest over two years.
What, no penalty clause for prepayment?
Seriously, doesn't something seem a little wrong in that description? Who negotiated for the Fed? Tony Soprano?
Is it a purchase or a collateralized loan? The way people are describing it is a purchase for 79.9% of the company, and AIG repays the full purchase price to the Fed in two years for with 10+% annual interest, AND the Fed keeps the ownership.
We suspect the press release was written hurriedly and the newswires and bloggers are running with it without questioning what it really means, and details will be forthcoming.
We admit we do not understand the deal as it is being explained. It does not make sense. We suspect that the ownership is really warrants with either a strike price or exercisable upon some prearranged condition of non-payment.
The change in management can be a negotiated item in the note, and does not require actual majority share ownership control.
Its not a trivial question because it speaks to existing shareholder dilution and the stock price. We are sure Hank Greenberg knows the answer, but we can't seem to find his phone number.
But like everyone else we are tired and in news overload, so let's call it a night and let the market decide what's what.
