The U.S. Federal Reserve Board and the U.S. Treasury today announced a restructuring of the government’s financial support to American International Group that will see the Treasury take an equity stake in the firm, and the Fed will slash the interest rate it must pay on its loan.

The Treasury will purchase US$40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Fed to reduce from US$85 billion to US$60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York on Sept. 16.

Additionally, the interest rate on the facility will be reduced to three-month Libor plus 300 basis points from the current rate of three-month Libor plus 850 basis points, and the fee on undrawn funds will be reduced to 75 basis points from the current rate of 850 basis points. The length of the facility will be extended from two years to five years.

The Fed and Treasury said that these changes are being made “in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers.”

The Fed has also authorized the New York Fed to establish two new lending facilities relating to AIG that are designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities. In one new facility, the New York Fed will lend up to US$22.5 billion to a newly formed limited liability company to fund the LLC’s purchase of residential mortgage-backed securities from AIG’s U.S. securities lending collateral portfolio. Under the other new facility, the New York Fed will lend up to US$30 billion to a newly formed LLC to fund the purchase of multi-sector collateralized debt obligations on which AIG Financial Products has written credit default swap contracts.

AIG reported a net loss for the third quarter of US$24.5 billion compared to 2007 third quarter net income of US$3.09 billion. Commenting on the results, AIG chairman and CEO Edward Liddy said, “Third quarter results reflect extreme dislocations and volatility in the capital markets and significant charges related to restructuring activities. Reported earnings are not indicative of the underlying core earnings power of our insurance businesses, which remain solidly capitalized. Retention of our customers remains strong and reflects the support and loyalty of our long-term partners, intermediaries and sponsors.”

Following Monday’s announcement, A.M. Best Co. affirmed the financial
strength ratings and issuer credit ratings of the insurance subsidiaries of AIG. In addition, A.M. Best also affirmed the issuer credit rating of AIG.

All the ratings have been assigned a negative outlook.

A.M. Best’s removal of the ratings from under review reflects the protracted time frame necessary for an orderly sale of AIG’s assets, which exceeds the usual near term time frame incorporated in an under review status.

The ratings could be downgraded at any time if events do not meet expectations, A.M. Best said. Alternatively, the sale of a business to a higher rated organization could result in an upgrade to the business sold, A.M. Best said.

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