AIG’s board is set to finalise a restructuring plan on Wednesday that would increase the US Treasury’s stake in the insurer to about 90 per cent as a step toward an eventual government exit.
People close to the situation said AIG directors were expected to formally discuss for the first time the Treasury’s plan to convert $49bn in preferred shares into common stock. This would raise the government’s stake from the current 80 per cent, while diluting the holdings of existing shareholders.
People familiar with the situation said the plans were fluid but added that issuing warrants, rather than common stock, would enable AIG to keep its share count down while offering some solace to diluted shareholders.To make up for this dilution, the government would offer the outside shareholders warrants giving them the right to buy AIG shares in the future at a discount to the current price.
“This would give other people the chance to buy shares on the cheap as well,” said a person familiar with the deal. A second person familiar with the plan said the warrants would pay off only after the government had made money.
The Treasury is expected to sell its AIG stock in the market over a period, as it has with its investment in Citigroup. AIG and the Treasury declined to comment.
Approval of the plan by the AIG board would mark a significant step in freeing the insurer of government control and repaying taxpayers for the $182bn of public money used to buttress the group at the peak of the crisis in 2008.
Official estimates of the government’s ultimate loss range from $36bn to $50bnbut AIG executives and officials hope the plan will deliver a better outcome. The restructuring includes the repayment of loans to the New York Federal Reserve Bank, partly with proceeds from next month’s planned initial public offering of Asian subsidiary AIA.
The plan comes as the Treasury this week prepares to end payments from the $700bn troubled asset relief programme and announce that it now expects a much lower loss, and perhaps even a profit, on the investments that helped shore up the financial system in 2008 and 2009.
AIG has warned investors in filings that the conversion of the government’s preferred stock into common equity could result in a severe dilution in the value of the holdings of non government shareholders. The plan for warrants represents an attempt to cushion the blow.
People involved with the restructuring plan, developed over several months by AIG, the New York Fed and the Treasury, have been surprised at the resilience of AIG stock.
People familiar with the situation said the plans were fluid but added that issuing warrants, rather than common stock, would enable AIG to keep its share count down while offering some solace to diluted shareholders.To make up for this dilution, the government would offer the outside shareholders warrants giving them the right to buy AIG shares in the future at a discount to the current price.
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