The American International Group – the insurance company that received the US government bailout money during the banking crisis, has signed a loan agreement to borrow $4.3 billion.
Analysts perceive the private sector borrowing as an indication of the insurance major’s credit worthiness being viewed as positive by creditors. This also shows AIG’s attempt to steer itself away from government support.
Markets reacted favourably to the news and the stocks rose by 9% on Monday, making it the biggest gainer of the day on the New York Stock Exchange (NYSE).
AIG was one of the biggest beneficiaries of the government bailout scheme after the subprime mortgage crisis had hit the US, receiving $182 billion in taxpayer’s money.
The US treasury still holds majority of the insurer with its stake recorded at 92%.
36 US banks have formed a consortium to lend the latest $4.3 billion to AIG. The stock market perceived this as the struggling insurer getting back on its feet again.
Chief Executive Robert Benmosche said: “This success is another important vote of confidence by the market in AIG”.
AIG will be able to withdraw the present sanctioned loan of $4.3 billion in three tranches. The first tranche of $1.5 billion 364 day tenor loan can be withdrawn once the insurer pays back an existing $21 billion loan from the Federal Reserve Bank of New York (FRBNY). As per the loan covenant executed, the second tranche consists of $1.5 billion 3 year maturity where the third tranche consists of a $1.3 billion Letter of Credit (LC) for AIG’s property insurance subsidiary Chartis.
The recent borrowing is continuation of a plan AIG charted for itself in September, under which the company seeks to augment its capital base significantly to absorb future unexpected losses. This also paves the way for the government’s gradual exit from the company.
The company will settle the $21 billion FRBNY loan in the beginning of next year from the proceeds of its earlier selloff of the Asian subsidiary AIA and life insurance unit Alico.
Once the debts are settled, the US treasury will start selling shares worth $91 billion that it currently owns, in the open market. AIG also plans to issue fresh equity worth $10-15 billion to raise capital for business.