AIG 2008 Annual Report Download - page 31

have a significant adverse effect on the liquidity of AIG’s common stock, making it more difficult and expensive for
AIG to raise additional capital.
Fed Facility and Series D Preferred Stock
The Fed Credit Agreement and the Series D Preferred Stock require AIG to devote significant resources to debt
repayment and preferred stock dividends for the foreseeable future, thereby significantly reducing capital available
for other purposes. AIG is required to repay the five-year Fed Facility primarily from the proceeds of sales of
assets, including businesses. The amount available under the Fed Facility is permanently reduced by the amount of
such repayments as they are made. In addition, the $40 billion liquidation preference of the Series D Fixed Rate
Cumulative Perpetual Preferred Stock (Series D Preferred Stock) issued to the United States Department of the
Treasury accumulates dividends at 10 percent per year. These dividends, and the dividends on any other series of
preferred stock issued by AIG, are not deductible for tax purposes.
AIG’s significant obligations require it to dedicate all of its proceeds from asset dispositions and a considerable
portion of its cash flows from operations to the repayment of the Fed Facility, thereby reducing the funds available
for investment in its businesses. Moreover, because AIG’s debt service and preferred stock dividend obligations are
very high, AIG may be more vulnerable to competitive pressures and have less flexibility to plan for or respond to
changing business and economic conditions.
A further inability to effect asset sales in accordance with its asset disposition plan or to do so at acceptable
prices could result in AIG not being able to repay its borrowings under the Fed Facility. See Capital Resources and
Liquidity Requirements — Asset Disposition Plan for a discussion of AIG’s asset disposition plan.
Borrowings available to AIG under the Fed Facility may not be sufficient to meet AIG’s funding needs and
additional financing may not be available or could be prohibitively expensive. Additional collateral calls,
continued high surrenders of annuity and other policies, further downgrades in AIG’s credit ratings or a further
deterioration in AIGFP’s remaining super senior credit default swap portfolio could cause AIG to require additional
funding in excess of the borrowings available under the Fed Facility. In that event, AIG would be required to find
additional financing and new financing sources. In the current business environment such financing could be
difficult, if not impossible, to obtain and, if available, very expensive, and additional funding from the NY Fed,
United States Department of the Treasury or other government sources may not be available. If AIG is unable to
obtain sufficient financing to meet its capital needs, AIG could become insolvent.
Borrowings under the Fed Facility are subject to the NY Fed being satisfied with the collateral pledged by AIG.
A condition to borrowing under the Fed Facility is that the NY Fed be satisfied with the collateral pledged by AIG
(including its value). It is possible that the NY Fed may determine that AIG’s collateral is insufficient to permit a
borrowing for many reasons including:
• a decline in the value of AIG’s businesses;
• poor performance in one or more of AIG’s businesses; and
• low prices received by AIG in its asset disposition plan.
Such a determination could limit AIG’s ability to borrow under the Fed Facility.
AIG must sell or otherwise dispose of significant assets to service the debt under the Fed Facility. AIG must
make asset dispositions to repay the borrowings under the Fed Facility. A continued delay or inability to effect these
dispositions at acceptable prices and on acceptable terms could result in AIG being unable to repay the Fed Facility
by its maturity date.
While AIG has adopted an asset disposition plan, as discussed in Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity — Asset Disposition Plan, this plan may not be
successfully executed due to, among other things:
• an inability of purchasers to obtain funding due to the deterioration in the credit markets;
• a general unwillingness of potential buyers to commit capital in the difficult current market environment;
• an adverse change in interest rates and borrowing costs; and
AIG 2008 Form 10-K 25
American International Group, Inc., and Subsidiaries