Business Context and Reporting Period
Company: American International Group, Inc. (AIG)
Filing Type: Form 8-K (Current Report)
Date of Report: November 25, 2008
Event: Entry into a Material Definitive Agreement with the Federal Reserve Bank of New York (NY Fed) and Maiden Lane III LLC (ML III) to address credit default swap (CDS) exposures held by AIG Financial Products Corp. (AIGFP).
Key Financial Metrics and Transaction Terms
- Senior Loan Facility: Up to $30.0 billion provided by the NY Fed to ML III at one-month LIBOR + 1.00% with a six-year expected term.
- AIG Equity Contribution: $5.0 billion invested in ML III, accruing distributions at one-month LIBOR + 3.00% (fully subordinated to the Senior Loan).
- CDS Termination Scope: Agreements executed to terminate approximately $53.5 billion notional amount of CDS.
- Immediate Settlement: $46.1 billion principal amount of Multi-Sector CDOs settled on November 25, 2008.
- Funding of Settlement: Funded via $15.1 billion in Senior Loan borrowings, $25.9 billion in collateral surrendered by AIGFP, and the $5.0 billion AIG equity investment.
- Contingent Interest: Upon full repayment, remaining amounts are split 67% to NY Fed and 33% to AIG.
Material Changes and Transaction Mechanics
The filing details a significant restructuring of AIG's derivative liabilities. AIGFP terminated CDS contracts related to Multi-Sector CDOs, with ML III purchasing the underlying assets. A Shortfall Agreement was established to manage the difference between the notional amount of terminated CDS and the market value of the CDOs as of October 31, 2008, relative to previously posted collateral. No payment was required from AIGFP under the Shortfall Agreement for the initial $46.1 billion purchase.
Outlook, Risks, and Contingencies
- Remaining Settlements: Settlement of the remaining $7.4 billion notional amount of CDS is contingent on counterparties obtaining related CDOs, expected by year-end. Collateral posting is suspended pending this settlement.
- Unresolved Exposure: Approximately $11.2 billion of exposure to Multi-Sector CDOs remains without executed termination agreements. AIG and the NY Fed are working to structure these terminations.
- Market Risk: If counterparties cannot obtain CDOs or if the $11.2 billion exposure is not terminated, AIG retains market risk and faces potential additional unrealized valuation losses and collateral posting requirements.
- Control Rights: The NY Fed is the controlling party of ML III for the duration of the loan; AIG has no control rights over ML III.
Investor Verification Checklist
- Verify the status of the $7.4 billion contingent CDS settlement and whether collateral posting provisions have resumed.
- Monitor progress on structuring terminations for the remaining $11.2 billion of Multi-Sector CDO exposure.
- Review the full text of the Master Investment and Credit Agreement (Exhibit 10.1) and Shortfall Agreement (Exhibit 10.2) for detailed covenants.
- Assess the impact of the $5.0 billion equity contribution on AIG's remaining liquidity and capital position.