Shareholder approval, that is.
Remember how AIG had 48 hours to live? They were granted a stay of execution, so to speak, when the Treasury gave the insurer an $85bn lifeline.
According to the original terms of the deal, the government could get up to 79.9 per cent of the company through warrants, once exercised. That meant it had to be voted on by stockholders as AIG doesn’t have enough share capital to make the warrant issuance to the government. It also meant that AIG stock would be (perhaps fairly) toast.
Shareholders, led by Hank Greenberg, were understandably annoyed. They might even have voted no, necessitating AIG finding another loan. This from Dealbook:
In this case, the only real alternative is for A.I.G. to line up another loan. Now that the market has stabilized, this may indeed be possible. The terms of the government’s loan – approximately 11.5 percent interest plus up to a 79.9 percent stake with collateral over all of A.I.G.’s unregulated subsidiaries – are extremely favorable to the government. In normal times, the market would take care of this, and some private party would make the loan itself.
But there’s another possibility – one which many seem to be resorting to in these “extreme circumstances” – namely bending the rules. AIG issued a revised regulatory filing on Sept. 19 – which omits any mention of shareholder approval:
The summary of terms of the revolving credit facility provides that AIG may borrow up to $85 billion from the NY Fed. AIG’s borrowings under the revolving credit facility will bear interest, for each day, at a rate per annum equal to three-month Libor plus 8.50%. The revolving credit facility will have a 24-month term and will be secured by a pledge of assets of AIG and various subsidiaries. The revolving credit facility will contain affirmative and negative covenants, including a covenant to pay down the facility with the proceeds of asset sales. The summary of terms also provides for a 79.9% equity interest in AIG. The corporate approvals and formalities necessary to create this equity interest will depend upon its form.
Shareholders are still meeting tomorrow in New York to discuss alternatives – something that in theory could be helped now the Fed has proposed a $700bn finance relief plan. However, with AIG having tapped $25bn of the credit line already we’re not sure that’s possible anymore. More from Dealbook:
The filing raises more questions than answers. First, are the terms moving in light of Friday’s other developments? Second, if they are, does the Federal Reserve now realize its problem and is it strong-arming A.I.G. to ensure that it gets this interest no matter what? Do we have a Bear situation where a transaction will be structured to force it through?
One would think the federal government would be happy to avoid having to finance this loan. If it is indeed working to structure this interest and loan so that there is no way for the free market to substitute for it, that is troubling.
Very troubling indeed.