AIG 2009 Annual Report Download - page 49

American International Group, Inc., and Subsidiaries
AGF
Since the events of September 2008, AGF’s traditional borrowing sources, including its ability to issue unsecured
debt in the capital markets, have remained unavailable, and AGF does not expect them to become available in the
near future. AGF’s liquidity concerns, dependency on AIG, results of its operations and the uncertainty regarding the
availability of support from AIG have negatively impacted its credit ratings.
In addition to finance receivable collections, AGF is exploring additional initiatives to meet its financial and
operating obligations. These initiatives include additional on-balance sheet securitizations, portfolio sales, and
expense reductions. During 2009, AGF closed 200 branch offices, reduced retail sales financing operations, reduced its
number of employees by approximately 1,400 through reductions in force and attrition, and sold $1.9 billion of finance
receivables held for sale. In July 2009, AGF securitized $1.9 billion of real estate loans and received $967 million in
cash proceeds.
If AGF’s sources of liquidity are not sufficient to meet its contractual obligations as they become due over the next
twelve months, AGF will seek additional funding from AIG, which funding would be subject to AIG receiving the
consent of the FRBNY.
Significant Events in 2009
Consummation of the AIA and ALICO SPV Transactions
On December 1, 2009, AIG and the FRBNY completed two transactions pursuant to which AIG transferred to the
FRBNY noncontrolling, nonvoting, callable, preferred equity interests (Preferred Interests) in two newly-formed
special purpose vehicles (SPVs) in exchange for a $25 billion reduction of the balance outstanding and the maximum
credit available under the FRBNY Credit Facility, which resulted in $5.2 billion of accelerated amortization of a
portion of the prepaid commitment asset. Each SPV has (directly or indirectly) as its only asset 100 percent of the
common stock of an operating subsidiary (AIA in one case and ALICO in the other). AIG owns all of the voting
common equity interests of each SPV. AIG’s purpose for entering into these agreements was to position AIA and
ALICO for initial public offerings or third-party sale, depending on market conditions and subject to customary
regulatory approvals. An equally important objective of the transactions was to enhance AIG’s capitalization
consistent with rating agency requirements in order to complete its restructuring plan and repay the support it has
received from the FRBNY and the Department of the Treasury. The Preferred Interests are redeemable at the option
of AIG and are transferable at the FRBNY’s discretion. In the event the board of managers of either SPV initiates a
public offering, liquidation or winding up or a voluntary sale, the proceeds must be distributed to the Preferred
Interests until the Preferred Interests’ redemption value has been paid. The redemption value of the Preferred
Interests is the liquidation preference, which includes any undistributed preferred returns through the redemption
date, and the amount of distributions that the Preferred Interests would receive in the event of a 100 percent
distribution to all the common and Preferred Interest holders at the redemption date.
The Preferred Interests entitle the FRBNY to veto rights over certain significant actions by the SPVs and provide
the FRBNY with certain rights including the right to compel the SPVs to use their best efforts to take certain actions,
including an initial public offering or a sale of the SPVs or the businesses held by the SPVs. After December 1, 2010,
and prior thereto with the concurrence of the trustees of Trust, the FRBNY can compel the holders of the common
interests to sell those interests should the FRBNY decide to sell its preferred interests. Following an initial public
offering, the FRBNY will have the right to exchange its Preferred Interests for common shares of the publicly-traded
entity.
The Preferred Interests in the AIA SPV have an initial liquidation preference of $16 billion and have the right to a
preferred return of five percent per year compounded quarterly through September 22, 2013 and nine percent
thereafter. If the preferred return is not distributed, the amount is added to the Preferred Interests’ liquidation
preference. The AIA Preferred Interests participate in one percent of net income after the preferred return. The AIA
Preferred Interests are also entitled to a one percent participation right of any residual value after (i) the AIA
preferred return, (ii) the participation right of one percent of AIA’s net income, (iii) the liquidation preference on all
Preferred Interests has been paid and (iv) the holders of the common interests (currently AIG) have received,
41 AIG 2009 Form 10-K