**CDS** A.I.G.’s Bailout Terms Revealed
September 30, 2008, 10:31 am
On Friday at 4:42 p.m., the insurance giant American International Group finally filed documents with the Securities and Exchange Commission setting forth the terms of its government loan and disclosing the interest that the government will have in it.
There are a number of items of interest:
* In exchange for $500,000 and extending the $85 billion loan, the United States government will receive 100,000 shares of A.I.G. convertible participating serial preferred stock. The preferred shares will have an interest equivalent to 79.9 percent of the votes of A.I.G. and be entitled to receive 79.9 percent of any dividends paid by A.I.G. on A.I.G.’s common stock.
The preferred shares will be convertible into shares equaling 79.9 percent of the common stock of A.I.G.. Here, the first interesting quirk arises. The preferred shares are actually issued to a trust, of which the Treasury Department is a beneficiary.
This is not the Federal Reserve, and the distinction is important since the Fed is ostensibly privately owned; this way, the taxpayers get the benefit of any gain on the equity.
* The deal is clearly structured to avoid a meaningful shareholder vote. Typically, the issuance of the preferred would require a vote under the New York Stock Exchange’s Rule 3.12. However, there is an exception under N.Y.S.E. Rule 3.12.05 if the delay in vote would “jeopardize the financial viability” of A.I.G.
A.I.G. is relying upon this exemption, and after a mandatory 10-day waiting period runs out, A.I.G. will issue out the preferred stock to the trust.
But there still needs to be a vote by the common shareholders to authorize the common shares issuable upon conversion of the preferred, since A.I.G. does not have sufficient number of authorized common shares. However, the government preferred will have a vote. So, the government will just vote this through with its newly issued 79.9 percent preferred share interest. How about them apples?
This clearly would violate Delaware law in normal times, but I would like to see someone win this case. (I doubt any shareholder plaintiffs’ law firm will even bring it after the Bear Stearns case.)
* The Fed closes the circle by stating under the loan agreement that if the preferred is not issued within 45 days, it is an event of default under the loan.
* There is tight control over A.I.G. There are requirements that the A.I.G. board of directors be comprised of members satisfactory to the government trust and that there be corporate governance standards acceptable to this government trust.
* The loan is structured to deliberately downsize A.I.G.. The key is Section 2.10 of the loan agreement — essentially all of the net proceeds of any sale, equity issuance, debt placement, any extraordinary receipt of cash greater than $1 million, and any excess cash on hand goes to repay the loan and reduce the aggregate amount which can be borrowed.
* The loan is secured by a pledge of the capital stock and assets of A.I.G.’s subsidiaries, with exclusions for property that cannot be pledged under A.I.G.’s debt instruments, as well as A.I.G.’s regulated subsidiaries, foreign subsidiaries and special purpose vehicles.
* The loan matures in two years in September 22, 2010. But given the crushing interest being paid — approximately 11.5 percent on outstanding amounts and 8.5 percent on undrawn commitments — A.I.G. needs to pay down this loan as soon as possible. According to The Wall Street Journal, A.I.G. is considering selling up to 15 businesses, including its aircraft leasing business.
As I said on Friday, “There is now going to be a feast, as buyers rush to pick up A.I.G.’s assets at fire-sale prices. This is a shame, really, since the company was a good competitor abroad for America, particularly in China. Now that Chinese business will probably just be sold to the Chinese at a bargain price.”
You can read the A.I.G./government documents on the S.E.C.’s Web site. |
