AIG Cuts Debt to $83.5 Billion Using Commercial Paper (Update2)

By Hugh Son
Bloomberg News
October 30, 2008

Oct. 30 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., reduced its debt under two credit lines to $83.5 billion by using cash from the Federal Reserve's commercial paper program.

The insurer got as much as $20.9 billion from the program, which swaps commercial paper for cash, AIG spokesman Nicholas Ashooh said today in an interview. The terms of the commercial paper funding are better than the original U.S. loan made last month to save New York-based AIG from collapse, he said.

"They're paying off a Fed loan with another kind of government subsidy -- it's like using one credit card to pay off another,'' said Robert Haines, an analyst at CreditSights Inc. "If they make progress paying off debts over time, I don't think it'll be viewed as necessarily a bad thing."

Chief Executive Officer Edward Liddy said he would sell units including U.S. life insurance and plane leasing to repay the $85 billion loan AIG received last month after ceding control to the U.S. The company got access to an additional $37.8 billion on Oct. 8 to shore up its securities-lending program. Liddy said this month in a PBS interview that AIG may need more than the $122.8 billion that was then available.

Securities Lending

The insurer's total debt under the two credit lines shrank to $83.5 billion from $90.3 billion a week earlier, the Fed said today. The updated balance -- which excludes AIG's participation in the U.S. commercial paper program -- is made up of $65.5 billion from its original loan, $17.7 billion on the securities- lending credit line and $331 million in interest, Ashooh said.

AIG's securities-lending program lost money on investments made using collateral from assets it loaned to third parties. Proceeds from the loan announced today will refinance AIG's outstanding commercial paper and also help pay down the firm's original $85 billion Fed debt, the insurer said in a regulatory filing today.

"It's about liquidity, the ability to get access to cash to satisfy our obligations," Ashooh said in an interview today.

AIG joined a growing list of borrowers that have sold tens of billions of dollars of the short-term debt to the central bank as credit became more difficult to obtain. Companies use commercial paper to finance daily expenses such as payroll and rent. The commercial paper market seized up when Lehman Brothers Holdings Inc. filed for bankruptcy in September.

AIG climbed 8 cents, or 5.2 percent, to $1.63 in New York stock Exchange composite trading at 4:05 p.m. A year ago, the shares closed at $62.81.

Commercial Paper

Companies using the Fed commercial paper facility have to pay the overnight indexed swap rate plus 1 percentage point, making a total of 1.74 percent today. Firms that don't post collateral must pay an additional 1 percentage point.

That is cheaper than the cost of AIG's $85 billion loan. The insurer will pay 8.5 percent annual interest plus the 3-month London interbank offered rate on money it draws from the two-year loan. Three-month Libor is 3.19 percent today compared with 2.88 percent the day the loan was announced.

AIG will have difficulty selling its businesses to pay off the loan amid "extremely poor market conditions," AIG's former CEO Maurice "Hank Greenberg said today in a letter to the insurer included in a regulatory filing. The government should modify its bailout of the company to reduce the need for the quick sale of assets, he said.

Collateral Damage

AIG is dependent on "what happens to the capital markets," Liddy, 62, said Oct. 8 on PBS's "The News Hour With Jim Lehrer. The firm needed cash after credit downgrades forced it to post more than $10 billion in collateral to clients who purchased guarantees on bonds that lost value.

"To the extent they continue to go down and we have to keep posting collateral, as it's called in the vernacular of the industry, it's possible it may not be enough," Liddy said of the $122.8 billion sum.

Liddy said in the interview that he thought AIG would stay within that limit.

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