FRBNY would receive preferred interests of $16 billion in AIA SPV, and of $9 billion in ALICO SPV

American International Group (AIG) has entered into an agreement with the Federal Reserve Bank of New York (FRBNY) to accomplish two goals: reducing the debt AIG owes to FRBNY by $25 billion; and positioning two of the company’s life insurance franchises, American International Assurance (AIA) and American Life Insurance Company (ALICO), for initial public offerings.

As per the agreement, AIG would contribute the equity of AIA and ALICO to separate special purpose vehicles (SPVs), in exchange for preferred and common interests in the SPVs. FRBNY will receive preferred interests in AIA SPV of $16 billion and in ALICO SPV of $9 billion, thereby decreasing the debt owed by AIG under the FRBNY credit facility by $25 billion. AIG’s outstanding balance under the FRBNY credit facility is approximately $40 billion.

AIG will hold the common interests in AIA and ALICO SPVs, and would benefit from their fair market value in excess of the value of the preferred interests, as the SPVs monetise their stakes in these companies in the future.

AIG’s transactions are expected to close in the second half of 2009. Until their separation as independent companies, AIA and ALICO will remain subsidiaries of AIG.