AIG 2008 Annual Report Download - page 32

• continued declines in AIG asset values and deterioration in its businesses.
Further, AIG may be unable to negotiate favorable terms in connection with asset sales, including with respect
to price. As a result, AIG may need to modify its asset disposition plan to sell additional or different assets.
If AIG is not able to repay the Fed Facility from the proceeds of asset dispositions and cannot otherwise repay
the Fed Facility in accordance with its terms, an event of default would result. In such an event, the NY Fed could
enforce its security interest in AIG’s pledged collateral. In addition, an event of default or declaration of
acceleration under the Fed Credit Agreement could also result in an event of default under other agreements.
In such an event, AIG would likely not have sufficient liquid assets to meet its obligations under such agreements.
The Fed Credit Agreement includes financial and other covenants that impose restrictions on AIG’s financial
and business operations. The Fed Credit Agreement requires AIG to maintain a minimum aggregate liquidity
level and restricts AIG’s ability to make certain capital expenditures. The Fed Credit Agreement also restricts AIG’s
and its restricted subsidiaries’ ability to incur additional indebtedness, incur liens, merge, consolidate, sell assets,
enter into hedging transactions outside the normal course of business, or pay dividends. These covenants could
restrict AIG’s business and thereby adversely affect AIG’s results of operations.
Moreover, if AIG fails to comply with the covenants in the Fed Credit Agreement and is unable to obtain a
waiver or amendment, an event of default would result. If an event of default were to occur, the NY Fed could,
among other things, declare outstanding borrowings under the Fed Credit Agreement immediately due and payable
and enforce its security interest in AIG’s pledged collateral. In addition, an event of default or declaration of
acceleration under the Fed Credit Agreement could also result in an event of default under AIG’s other agreements.
AIG’s results of operations and cash flows will be materially and adversely affected by a significant increase in
interest expense and preferred stock dividends paid. AIG expects its results of operations in 2009 and in future
periods to be significantly adversely affected by the recognition of interest expense on borrowings under the Fed
Facility and by the payment of significant preferred stock dividends. In addition, the prepaid commitment fee asset
of $23 billion associated with the Series C Preferred Stock (described below) was capitalized and is being amortized
through interest expense over the term of the Fed Facility, which is five years.
The Series D Preferred Stock accrues dividends, payable if, as and when declared, at a rate of 10 percent per
annum, or $4 billion, on the $40 billion of liquidation preference, which are not tax deductible.
Controlling Shareholder
Following the issuance of the Series C Preferred Stock to the AIG Credit Facility Trust, a trust for the sole
benefit of the United States Treasury, the Trust, which is overseen by three independent trustees, will hold a
controlling interest in AIG. AIG’s interests and those of AIG’s minority shareholders may not be the same as those of
the Trust or the United States Treasury. In accordance with the Fed Credit Agreement, in early March 2009, AIG
expects to issue 100,000 shares of Series C Perpetual, Convertible, Participating Preferred Stock, par value $5.00
per share and at an initial liquidation preference of $5.00 per share (the Series C Preferred Stock), to the AIG Credit
Facility Trust, a trust for the sole benefit of the United States Treasury (together with its trustees, the Trust)
established under the AIG Credit Facility Trust Agreement dated as of January 16, 2009 (as it may be amended from
time to time, the Trust Agreement). The Trust will hold the Series C Preferred Stock for the sole benefit of the
United States Treasury. The Series C Preferred Stock is entitled to:
• participate in any dividends paid on the common stock, with the payments attributable to the Series C
Preferred Stock being approximately 77.9 percent of the aggregate dividends paid on common stock,
treating the Series C Preferred Stock as converted; and
• to the extent permitted by law, vote with AIG’s common stock on all matters submitted to AIG’s
shareholders and hold approximately 77.9 percent of the aggregate voting power of common stock, treating
the Series C Preferred Stock as converted.
The dividends payable on and the total voting power of (i) the shares of common stock underlying the Series C
Preferred Stock, (ii) the 53,798,766 shares of common stock underlying the warrants issued to the United States
Department of the Treasury on November 25, 2008 and (iii) the shares of common stock underlying the warrants to
be issued to the United States Department of the Treasury in connection with the capital commitment facility will
26 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries