CORRESP
[AIG Letterhead]
June 29, 2009
Mr. Jeffrey P. Riedler
Assistant Director
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Mail Stop 6010
Washington, D. C. 20549
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Re:
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American International Group, Inc. |
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Amendment No. 1 to |
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Registration Statement on Form S-4 |
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Filed May 1, 2009 |
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and Documents Incorporated by Reference |
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File No. 333-158098 |
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Amendment No. 1 to |
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Registration Statement on Form S-4 |
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Filed May 1, 2009 |
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and Documents Incorporated by Reference |
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File No. 333-158019 |
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Response Letter dated April 30, 2009 |
Dear Mr. Riedler:
We are in receipt of your letter dated May 13, 2009 and thank you for your comments concerning
the above-captioned filings of American International Group, Inc. (AIG). We are pleased to respond
to the Staffs comments contained in your comment letter of May 13, 2009 (the Comment Letter).
Following resolution of the Staffs comments contained in the Comment Letter, AIG intends, as
soon as acceptable, to file an Amendment No. 2 to each of the above-referenced registration
statements on Form S-4, together with requests for acceleration of the effective date of the
above-referenced registration statements on Form S-4. AIG has previously furnished to the Staff a
letter dated May 14, 2009 containing the acknowledgements which are set forth in the Staffs letter
of April 2, 2009 and which the Staff requested AIG to make in connection with a request for
acceleration.
With respect to your comment one, we intend to file a Current Report on Form 8-K to add a
risk factor related to the super senior credit default swaps (CDS) written by AIG Financial
Products Corp. (AIGFP) for financial institutions for the purpose of providing regulatory capital
relief, which summarizes information previously disclosed by AIG, to the risk factors set forth
in AIGs Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K)
and in AIGs Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (First
Quarter
2009 Form 10-Q). We also intend to enhance the disclosure relating to AIGFPs regulatory capital
CDS transactions in Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) of AIGs Quarterly Report on Form 10-Q for the quarter ended June 30, 2009
(Second Quarter 2009 Form 10-Q) as discussed below.
With respect to your comment two and our discussion with the Staff on May 27, 2009, AIG
intends to expand its disclosures concerning the amortization of the prepaid commitment fee asset
related to the Fed Credit Agreement as part of its Form 8-K filing to revise the financial
statements included in AIGs 2008 Form 10-K to reflect the retrospective application of FAS 160.
AIG acknowledges that the adequacy and accuracy of the disclosure in AIGs filings is the
responsibility of AIG, that Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Securities and Exchange Commission (the Commission) from taking any action
with respect to the filings and that Staff comments may not be asserted by AIG as a defense in any
proceeding initiated by the Commission or any person under the Federal securities laws of the
United States.
To facilitate your review, we have repeated your questions below in bold face type, followed
by the responses of AIG in regular type. The numbers correspond to the numbers in the Comment
Letter.
Form 10-K for the Fiscal Year Ended 12/31/08
Item 1A. Risk Factors, page 21
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1. |
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Please refer to prior comments 20 and 24. We continue to believe that your risk factor
disclosure should be enhanced to specifically discuss the material risks relating to your
regulatory capital CDS transactions. Therefore, please include a new risk factor relating
to your regulatory capital CDS transactions in which you: |
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Include language similar to that appearing in the last paragraph under
Regulatory Capital Portfolio on page 149 of your 2008 10-K; |
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Quantify your exposure to these transactions; |
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Discuss that you receive limited data relating to the assets underlying these
transactions as disclosed on page 136 of your most recent Form 1O-Q and the effect of
these limitations in understanding the risks of these CDS; |
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Discuss how you are able to determine reasonable fair values of these CDS
despite these limitations; and |
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If an assumption inherent in the fair value is that the counterparties will
terminate the transactions within the next twelve months, disclose why this is a
reasonable assumption and the effect of this assumption on the fair value of these CDS. |
AIG Response
2
In response to the Staffs comment, AIG will file a Current Report on Form 8-K to add the
following risk factor, which summarizes information previously disclosed by AIG, to the risk
factors set forth in AIGs 2008 Form 10-K and in AIGs First Quarter 2009 Form 10-Q:
If the credit markets continue to deteriorate, AIG may recognize unrealized market
valuation losses in AIGFPs regulatory capital super senior credit default swap portfolio in
future periods which could have a material adverse effect on AIGs consolidated financial
condition or consolidated results of operations. Moreover, the period of time that AIGFP
remains at risk for such deterioration could be significantly longer than anticipated if
AIGFPs expectations with respect to the termination of transactions in its regulatory
capital portfolio do not materialize.
A total of $192.6 billion (consisting of corporate loans and prime residential
mortgages) in net notional amount of the super senior credit default swap (CDS) portfolio
of AIG Financial Products Corp. and AIG Trading Group, Inc. and their respective
subsidiaries (collectively, AIGFP), as of March 31, 2009, represented derivatives written
for financial institutions, principally in Europe, for the purpose of providing regulatory
capital relief rather than for arbitrage purposes. The fair value of the derivative
liability for these CDS transactions was $393 million at March 31, 2009.
The regulatory benefit of these transactions for AIGFPs financial institution
counterparties is generally derived from the terms of the Capital Accord of the Basel
Committee on Banking Supervision (Basel I) that existed through the end of 2007 and which is
in the process of being replaced by the Revised Framework for the International Convergence
of Capital Measurement and Capital Standards issued by the Basel Committee on Banking
Supervision (Basel II). Financial institution counterparties are expected to transition
from Basel I to Basel II over a two-year adoption period through December 31, 2009, after
which they will receive little or no additional regulatory benefit from these CDS
transactions, except in a small number of specific instances, and therefore AIGFP expects
that the counterparties will terminate the vast majority of these transactions within the
next 12 months. The pace at which these CDS transactions will be terminated following the
transition to Basel II is affected by a number of factors, including the credit performance
of the underlying assets.
The nature of the information provided or otherwise available to AIGFP regarding the
performance and credit quality of the underlying assets in each regulatory capital CDS
transaction is not consistent across all transactions. Furthermore, in a majority of
corporate loan transactions and all of the residential mortgage transactions, the pools are
blind, meaning that the identities of obligors are not disclosed to AIGFP. In addition,
although AIGFP receives periodic reports on the underlying asset pools, virtually all of the
regulatory capital CDS transactions contain confidentiality restrictions that preclude
AIGFPs public disclosure of information relating to the underlying referenced assets. AIGFP
analyzes the information regarding the performance and credit quality of the
underlying pools of assets required to make its own risk assessment and to determine
any changes in credit quality with respect to such pools of assets. While much of this
3
information received by AIGFP cannot be aggregated in a comparable way for disclosure
purposes because of the confidentiality restrictions and the inconsistency of the
information, it does provide a sufficient basis for AIGFP to evaluate the risks of the
portfolio and to determine a reasonable estimate of fair value.
Given the current performance of the underlying portfolios, the level of subordination
and AIGFPs own assessment of the credit quality, as well as the risk mitigants inherent in
the transaction structures, AIGFP does not expect that it will be required to make payments
pursuant to the contractual terms of those transactions providing regulatory relief.
Further, AIGFP expects that counterparties will terminate these transactions prior to their
maturity. AIGFP will continue to assess the valuation of this portfolio and monitor
developments in the marketplace. Given the potential for further significant deterioration
in the credit markets, there can be no assurance that AIG will not recognize unrealized
market valuation losses from this portfolio in future periods. AIG could also remain at risk
for a significantly longer period of time than anticipated if AIGFPs expectations with
respect to the termination of these transactions by its counterparties do not materialize.
Moreover, given the size of the credit exposure, a decline in the fair value of this
portfolio could have a material adverse effect on AIGs consolidated results of operations
or consolidated financial condition.
AIG intends to enhance the disclosure relating to AIGFPs regulatory capital CDS
transactions similar to the following language (which is based on first quarter 2009
information) in the Item 2. MD&A of AIGs Second Quarter 2009 Form 10-Q (this wording would
replace the last full paragraph on page 134 and all of the regulatory capital disclosures on
pages 135, 136 and 137 of AIGs First Quarter 2009 Form 10-Q):
In light of early termination experience to date and after analyses of other market
data, to the extent deemed relevant and available, AIG determined that there was no
unrealized market valuation adjustment for any of the transactions in this regulatory
capital relief portfolio for the quarter ended March 31, 2009 other than for transactions
where AIGFP believes the counterparty is no longer using the transaction to obtain
regulatory capital relief as discussed above. Although AIGFP believes the value of
contractual fees receivable on these transactions through maturity exceeds the economic
benefits of any potential payments to the counterparties, the counterparties early
termination rights, and AIGFPs expectation that such rights will be exercised, preclude the
recognition of a derivative asset for these transactions.
The following table presents, for each of the regulatory capital CDS transactions
corporate loan portfolio, the gross transaction notional amount at March 31, 2009, net
notional amount at March 31, 2009, attachment point at inception and at March 31, 2009,
inception to date realized losses through March 31, 2009 and percent non-investment grade at
March 31, 2009:
4
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Gross |
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Transaction |
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Percent |
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Notional |
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Net Notional |
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Realized Losses |
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Non-Investment |
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Amount at |
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Amount at |
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Attachment Point |
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Attachment Point |
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through |
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Grade at |
|
CDS |
|
March 31, 2009 |
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March 31, 2009 |
|
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at Inception(a) |
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at March 31, 2009(a) |
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March 31, 2009(b) |
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March 31, 2009(c) |
|
1 (d) |
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$ |
3,159 |
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$ |
2,654 |
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11.00 |
% |
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|
15.98 |
% |
|
|
0.14 |
% |
|
|
95.70 |
% |
2 |
|
|
3,321 |
|
|
|
2,789 |
|
|
|
16.00 |
% |
|
|
16.00 |
% |
|
|
0.00 |
% |
|
|
42.33 |
% |
3 |
|
|
959 |
|
|
|
896 |
|
|
|
10.10 |
% |
|
|
9.98 |
% |
|
|
0.48 |
% |
|
|
11.62 |
% |
4 (e) |
|
|
5,280 |
|
|
|
4,435 |
|
|
|
12.80 |
% |
|
|
16.00 |
% |
|
|
0.00 |
% |
|
|
7.61 |
% |
5 |
|
|
13,283 |
|
|
|
7,438 |
|
|
|
44.00 |
% |
|
|
44.00 |
% |
|
|
0.00 |
% |
|
|
2.06 |
% |
6 (e) |
|
|
5,280 |
|
|
|
4,541 |
|
|
|
11.20 |
% |
|
|
14.00 |
% |
|
|
0.00 |
% |
|
|
9.17 |
% |
7 |
|
|
2,387 |
|
|
|
2,151 |
|
|
|
10.00 |
% |
|
|
9.86 |
% |
|
|
0.18 |
% |
|
|
11.11 |
% |
8 (e) |
|
|
7,192 |
|
|
|
6,137 |
|
|
|
11.74 |
% |
|
|
14.67 |
% |
|
|
0.01 |
% |
|
|
11.17 |
% |
9 |
|
|
9,585 |
|
|
|
8,145 |
|
|
|
12.02 |
% |
|
|
15.02 |
% |
|
|
0.02 |
% |
|
|
14.87 |
% |
10 |
|
|
7,994 |
|
|
|
7,103 |
|
|
|
11.00 |
% |
|
|
11.15 |
% |
|
|
0.00 |
% |
|
|
6.95 |
% |
11 |
|
|
645 |
|
|
|
406 |
|
|
|
18.00 |
% |
|
|
37.07 |
% |
|
|
0.00 |
% |
|
|
62.40 |
% |
12 |
|
|
10,289 |
|
|
|
9,141 |
|
|
|
10.80 |
% |
|
|
11.16 |
% |
|
|
0.00 |
% |
|
|
5.23 |
% |
13 (f) |
|
|
5,098 |
|
|
|
1,984 |
|
|
|
19.99 |
% |
|
|
22.18 |
% |
|
|
0.00 |
% |
|
|
20.97 |
% |
14 |
|
|
12,341 |
|
|
|
10,843 |
|
|
|
11.30 |
% |
|
|
12.14 |
% |
|
|
0.02 |
% |
|
|
22.36 |
% |
15 |
|
|
5,140 |
|
|
|
4,560 |
|
|
|
11.00 |
% |
|
|
11.28 |
% |
|
|
0.09 |
% |
|
|
8.71 |
% |
16 |
|
|
5,161 |
|
|
|
4,017 |
|
|
|
21.00 |
% |
|
|
22.16 |
% |
|
|
0.00 |
% |
|
|
69.68 |
% |
17 |
|
|
9,298 |
|
|
|
2,849 |
|
|
|
12.00 |
% |
|
|
12.00 |
% |
|
|
0.00 |
% |
|
|
4.15 |
% |
18 |
|
|
2,465 |
|
|
|
2,069 |
|
|
|
15.85 |
% |
|
|
16.08 |
% |
|
|
0.00 |
% |
|
|
8.42 |
% |
19 |
|
|
4,060 |
|
|
|
3,294 |
|
|
|
14.50 |
% |
|
|
21.06 |
% |
|
|
0.00 |
% |
|
|
73.66 |
% |
20 |
|
|
2,250 |
|
|
|
1,793 |
|
|
|
12.30 |
% |
|
|
20.30 |
% |
|
|
0.00 |
% |
|
|
29.77 |
% |
21 |
|
|
1,041 |
|
|
|
709 |
|
|
|
23.44 |
% |
|
|
31.90 |
% |
|
|
0.00 |
% |
|
|
29.77 |
% |
22 |
|
|
2,491 |
|
|
|
2,126 |
|
|
|
11.73 |
% |
|
|
14.67 |
% |
|
|
0.00 |
% |
|
|
29.77 |
% |
23 |
|
|
2,000 |
|
|
|
1,820 |
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
0.00 |
% |
|
|
6.25 |
% |
24 |
|
|
9,739 |
|
|
|
7,481 |
|
|
|
17.00 |
% |
|
|
23.18 |
% |
|
|
0.00 |
% |
|
|
9.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
130,458 |
|
|
$ |
99,381 |
|
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|
|
|
|
|
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|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
(a) |
|
Expressed as a percentage of gross transaction notional amount of the referenced obligations.
As a result of participation ratios and replenishment rights, the attachment point may not
always be computed by dividing net notional amount by gross transaction notional amount. |
|
(b) |
|
Represents realized losses incurred by the transaction (defaulted amounts less amounts
recovered) from inception through March 31, 2009 expressed as a percentage of the initial gross
transaction notional amount. |
|
(c) |
|
Represents non-investment grade obligations in the underlying pools of corporate loans
expressed as a percentage of gross transaction notional amount. |
|
(d) |
|
Trade termination notice received by AIGFP with effective date of July 6, 2009. |
|
(e) |
|
Trade termination notices received by AIGFP through April 30, 2009 with effective dates in 2009. |
|
(f) |
|
Matured on April 27, 2009. |
The following table presents, for each of the regulatory capital CDS transactions
prime residential mortgage portfolio, the gross transaction notional amount at March 31,
2009, the net notional amount at March 31, 2009, attachment point at inception and at March
31, 2009 and inception to date realized losses through March 31, 2009:
5
|
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|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Net Notional |
|
|
|
|
|
|
|
|
|
|
Realized Losses |
|
|
|
Amount at |
|
|
Amount at |
|
|
Attachment Point |
|
|
Attachment Point |
|
|
through |
|
CDS |
|
March 31, 2009 |
|
|
March 31, 2009 |
|
|
at Inception(a) |
|
|
at March 31, 2009(a) |
|
|
March 31, 2009(b) |
|
25 |
|
$ |
584 |
|
|
$ |
376 |
|
|
|
17.01 |
% |
|
|
35.59 |
% |
|
|
2.15 |
% |
26 |
|
|
1,160 |
|
|
|
1,027 |
|
|
|
10.00 |
% |
|
|
11.45 |
% |
|
|
0.00 |
% |
27 |
|
|
380 |
|
|
|
238 |
|
|
|
18.48 |
% |
|
|
37.18 |
% |
|
|
1.43 |
% |
28 |
|
|
2,012 |
|
|
|
1,410 |
|
|
|
14.70 |
% |
|
|
29.91 |
% |
|
|
0.08 |
% |
29 |
|
|
324 |
|
|
|
229 |
|
|
|
16.81 |
% |
|
|
29.43 |
% |
|
|
0.83 |
% |
30 |
|
|
1,203 |
|
|
|
1,070 |
|
|
|
10.00 |
% |
|
|
11.04 |
% |
|
|
0.00 |
% |
31 |
|
|
2,215 |
|
|
|
1,719 |
|
|
|
10.70 |
% |
|
|
22.40 |
% |
|
|
0.03 |
% |
32 |
|
|
425 |
|
|
|
339 |
|
|
|
13.19 |
% |
|
|
20.20 |
% |
|
|
0.29 |
% |
33 (c) |
|
|
5,965 |
|
|
|
5,490 |
|
|
|
7.95 |
% |
|
|
7.95 |
% |
|
|
0.02 |
% |
34 (c) |
|
|
2,037 |
|
|
|
1,687 |
|
|
|
7.95 |
% |
|
|
17.19 |
% |
|
|
0.04 |
% |
35 (c) |
|
|
5,302 |
|
|
|
4,877 |
|
|
|
8.01 |
% |
|
|
8.01 |
% |
|
|
0.01 |
% |
36 |
|
|
29,236 |
|
|
|
17,246 |
|
|
|
18.25 |
% |
|
|
18.25 |
% |
|
|
0.00 |
% |
37 (c) |
|
|
6,084 |
|
|
|
5,607 |
|
|
|
7.85 |
% |
|
|
7.85 |
% |
|
|
0.01 |
% |
38 |
|
|
10,700 |
|
|
|
9,898 |
|
|
|
7.50 |
% |
|
|
7.49 |
% |
|
|
0.01 |
% |
39 (c) |
|
|
8,064 |
|
|
|
7,423 |
|
|
|
7.96 |
% |
|
|
7.96 |
% |
|
|
0.01 |
% |
40 |
|
|
2,741 |
|
|
|
2,262 |
|
|
|
12.40 |
% |
|
|
17.45 |
% |
|
|
0.00 |
% |
41 |
|
|
22,580 |
|
|
|
20,503 |
|
|
|
9.20 |
% |
|
|
9.19 |
% |
|
|
0.01 |
% |
42 |
|
|
4,449 |
|
|
|
3,054 |
|
|
|
11.50 |
% |
|
|
15.44 |
% |
|
|
0.00 |
% |
43 |
|
|
5,263 |
|
|
|
4,384 |
|
|
|
11.50 |
% |
|
|
16.70 |
% |
|
|
0.00 |
% |
44 |
|
|
1,767 |
|
|
|
1,326 |
|
|
|
14.57 |
% |
|
|
24.96 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,491 |
|
|
$ |
90,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Expressed as a percentage of gross transaction notional amount of the
referenced obligations. As a result of participation ratios and
replenishment rights, the attachment point may not always be computed
by dividing net notional amount by gross transaction notional amount. |
|
(b) |
|
Represents realized losses incurred by the transaction (defaulted
amounts less amounts recovered) from inception through March 31, 2009
expressed as a percentage of the initial gross transaction notional
amount. |
|
(c) |
|
Delinquency information is not provided to AIGFP for the underlying
pools of residential mortgages of these transactions. However,
information with respect to principal amount outstanding, defaults,
recoveries, remaining term, property use, geography, interest rates,
and ratings of the underlying junior tranches are provided to AIGFP
for such referenced pools. |
All of the regulatory capital CDS transactions directly or indirectly reference
tranched pools of large numbers of whole loans that were originated by the financial
institution (or its affiliates) receiving the credit protection, rather than structured
securities containing loans originated by other third parties. In the vast majority of
transactions, the loans are intended to be retained by the originating financial institution
and in all cases the originating financial institution is the purchaser of the CDS, either
directly or through an intermediary.
As further discussed below, AIGFP receives information monthly or quarterly regarding
the performance and credit quality of the underlying referenced assets. AIGFP also obtains
other information, such as ratings of the tranches below the super senior risk layer. The
nature of the information provided or otherwise available to AIGFP with respect to the
underlying assets in each regulatory capital CDS transaction is not
consistent across all transactions. Furthermore, in a majority of corporate loan
6
transactions and all of the residential mortgage transactions, the pools are blind, meaning
that the identities of the obligors are not disclosed to AIGFP. In addition, although AIGFP
receives periodic reports on the underlying asset pools, virtually all of the regulatory
capital CDS transactions contain confidentiality restrictions that preclude AIGFPs public
disclosure of information relating to the underlying referenced assets. The originating
financial institutions, calculation agents or trustees (Report Providers) provide periodic
reports on all underlying referenced assets as described below, including for those within
the blind pools. While much of this information received by AIGFP cannot be aggregated in a
comparable way for disclosure purposes because of the confidentiality restrictions and the
inconsistency of the information, it does provide a sufficient basis for AIGFP to evaluate
the risks of the portfolio and to determine a reasonable estimate of fair value.
For regulatory capital CDS transactions written on underlying pools of corporate loans,
AIGFP receives monthly or quarterly updates from the Report Provider for each such
referenced pool detailing, with respect to the corporate loans comprising such pool, the
principal amount outstanding and defaults. In virtually all of these reports, AIGFP also
receives information on recoveries and realized losses. AIGFP also receives quarterly
stratification tables for each pool incorporating geography, industry and, when not publicly
rated, the counterpartys assessment of the credit quality of the underlying corporate
loans. Additionally, for a significant majority of these regulatory capital CDS
transactions, upon the occurrence of a credit event with respect to any corporate loan
included in any such pool, AIG receives a notice detailing the identity or identification
number of the borrower, notional amount of such loan and the effective date of such credit
event.
Ratings from independent ratings agencies for the underlying assets of the corporate
loan portfolio are not universally available, but AIGFP estimates the ratings for the assets
not rated by independent agencies by mapping the information obtained from the Report
Providers to rating agency criteria. The Percent Non-Investment Grade information in the
table above is provided as an indication of the nature of loans underlying the transactions,
not necessarily as an indicator of relative risk of the CDS transactions, which is
determined by the individual transaction structures. For example, Small and Medium
Enterprise (SME) loan balances tend to be rated lower than loans to large, well-established
enterprises. However, the greater number of loans and the smaller average size of the SME
loans mitigate the risk profile of the pools. In addition, the transaction structures
reflect AIGFPs assessment of the loan collateral arrangements, expected recovery values,
and reserve accounts in determining the level of subordination required to minimize the risk
of loss. The percentage of non-investment grade obligations in the underlying pools of
corporate loans varies considerably. The four pools containing the highest percentages of
non-investment grade obligations, which include all transactions with pools having
non-investment grade percentages greater than 45 percent, are all granular SME loan pools
which benefit from collateral arrangements made by the originating financial institutions
and from work out of recoveries by the originating financial institutions. The average
number of loans in each
pool is over 7,400. This large number of smaller balance loans increases the
7
predictability of the expected loss and lessens the probability that discrete events will
have a meaningful impact on the results of the overall pool. Each transaction benefits from
a tranche junior to it which was still rated AAA by at least two rating agencies at March
31, 2009. As indicated on the table above, AIGFP has been notified that the pool with the
highest non-investment grade percentage will be terminated in July 2009 at no cost to AIGFP.
Only one other pool has non-investment grade percentage greater than 30 percent, but this
transaction has 2.75 years remaining, benefits from a reserve account which absorbs losses
prior to any tranche being impacted, has no realized losses from inception through March 31,
2009 (after the application of the reserve account) and has a tranche junior to it which was
rated AAA by two rating agencies at March 31, 2009. Approximately 0.2 percent of the assets
underlying the corporate loan transactions are in default. The percentage of assets in
default by transaction was available for all transactions and ranged from 0.0 percent to 0.9
percent.
For regulatory capital CDS transactions written on underlying pools of residential
mortgages, AIGFP receives quarterly reports for each such referenced pool detailing, with
respect to the residential mortgages comprising such pool, the aggregate principal amount
outstanding, defaults and realized losses. These reports include additional information on
delinquencies for the large majority of the transactions and recoveries for substantially
all transactions. AIGFP also receives quarterly stratification tables for each pool
incorporating geography for the underlying residential mortgages. The stratification tables
also include information on remaining term, property use and interest rates for a large
majority of the transactions.
Delinquency information for the mortgages underlying the residential mortgage
transactions was available on approximately 76 percent of the total gross transaction
notional amount and mortgages delinquent more than 30 days ranged from 0.1 percent to 4.1
percent, averaging 1.0 percent. For all but three transactions, which comprised less than
1.5 percent of the total gross transaction notional amount, the average default rate
(expressed as a percentage of gross transaction notional amount) was 0.2 percent and ranged
from 0.0 percent to 2.2 percent. The default rate on the remaining three transactions ranged
from 4.3 percent to 12.5 percent. The subordination on these three transactions ranged from
29.4 percent to 37.2 percent.
Where the rating agencies directly rate the junior tranches of the pools, AIG monitors
the rating agencies releases for any affirmations or changes in such ratings, as well as
any changes in rating methodologies or assumptions used by the rating agencies to the extent
available. The tables below show the percentage of regulatory capital CDS transactions
where there is an immediately junior tranche that is rated and the average rating of that
tranche across all rated transactions.
AIGFP analyzes the information regarding the performance and credit quality of the
underlying pools of assets to make its own risk assessment and to determine any changes in
credit quality with respect to such pools of assets. This analysis includes a review of
changes in pool balances, subordination levels, delinquencies, realized losses,
and expected performance under more adverse credit conditions. Using data provided
8
by
the Report Providers, and information available from rating agencies, governments, and other
public sources that relate to macroeconomic trends and loan performance, AIGFP is able to
analyze the expected performance of the overall portfolio because of the large number of
loans with similar characteristics that comprise the collateral pools.
Given the current performance of the underlying portfolios, the level of subordination
and AIGFPs own assessment of the credit quality, as well as the risk mitigants inherent in
the transaction structures, AIGFP does not expect that it will be required to make payments
pursuant to the contractual terms of those transactions providing regulatory relief.
Further, AIGFP expects that counterparties will terminate these transactions prior to their
maturity.
The following table presents AIGFPs regulatory capital corporate loans portfolio by
geographic location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Average |
|
|
through |
|
|
Weighted Average |
|
|
|
|
|
|
Ratings of |
|
At March 31, 2009 |
|
Notional |
|
|
% |
|
|
Attachment |
|
|
March 31, |
|
|
Maturity (Years) |
|
|
Number of |
|
|
Junior Tranches(c) |
|
Exposure Portfolio |
|
Amount |
|
|
of Total |
|
|
Point(a) |
|
|
2009(b) |
|
|
To First Call |
|
|
To Maturity |
|
|
Transactions |
|
|
% Rated |
|
|
Average Rating |
|
|
|
(In billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primarily Single Country |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
$ |
7.10 |
|
|
|
7.10 |
% |
|
|
17.30 |
% |
|
|
0.10 |
% |
|
|
3.50 |
|
|
|
9.90 |
|
|
|
3 |
|
|
|
100 |
% |
|
AAA |
Netherlands |
|
|
3.30 |
|
|
|
3.30 |
|
|
|
21.10 |
|
|
|
|
|
|
|
1.00 |
|
|
|
44.70 |
|
|
|
1 |
|
|
|
100 |
|
|
AAA |
Portugal |
|
|
2.60 |
|
|
|
2.70 |
|
|
|
16.00 |
|
|
|
0.20 |
|
|
|
0.30 |
|
|
|
10.50 |
|
|
|
1 |
|
|
|
100 |
|
|
AAA |
Australia |
|
|
1.80 |
|
|
|
1.80 |
|
|
|
9.00 |
|
|
|
|
|
|
|
0.50 |
|
|
|
2.00 |
|
|
|
1 |
|
|
|
100 |
|
|
AAA |
Finland |
|
|
0.40 |
|
|
|
0.40 |
|
|
|
37.10 |
|
|
|
|
|
|
|
2.80 |
|
|
|
5.80 |
|
|
|
1 |
|
|
|
100 |
|
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Single Country |
|
$ |
15.20 |
|
|
|
15.30 |
% |
|
|
17.70 |
% |
|
|
|
|
|
|
2.00 |
|
|
|
16.70 |
|
|
|
7 |
|
|
|
100 |
% |
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia |
|
|
2.10 |
|
|
|
2.10 |
|
|
|
16.10 |
|
|
|
|
|
|
|
0.80 |
|
|
|
3.00 |
|
|
|
1 |
|
|
|
100 |
|
|
AAA |
Europe |
|
|
60.20 |
|
|
|
60.60 |
|
|
|
19.20 |
|
|
|
|
|
|
|
0.50 |
|
|
|
5.60 |
|
|
|
11 |
|
|
|
100 |
|
|
AAA |
North America |
|
|
21.90 |
|
|
|
22.00 |
|
|
|
16.40 |
|
|
|
|
|
|
|
0.70 |
|
|
|
2.00 |
|
|
|
5 |
|
|
|
100 |
|
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Regional |
|
|
84.20 |
|
|
|
84.70 |
|
|
|
18.40 |
|
|
|
|
|
|
|
0.50 |
|
|
|
4.60 |
|
|
|
17 |
|
|
|
100 |
|
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99.40 |
|
|
|
100.00 |
% |
|
|
18.30 |
% |
|
|
|
|
|
|
0.80 |
|
|
|
6.30 |
|
|
|
24 |
|
|
|
100 |
% |
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Expressed as a percentage of gross transaction notional amount of the referenced obligations. |
|
(b) |
|
Represents realized losses incurred by the transaction (defaulted amounts less amounts
recovered) from inception through March 31, 2009 expressed as a percentage of the initial
gross transaction notional amount. |
|
(c) |
|
Represents the weighted average ratings, when available, of the tranches immediately junior
to AIGFPs super senior tranche. The percentage rated represents the percentage of net
notional amount where there exists a rated tranche immediately junior to AIGFPs super
senior tranche. |
The following table presents AIGFPs regulatory capital prime residential mortgage
portfolio summarized by geographic location:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Average |
|
|
through |
|
|
Weighted Average |
|
|
|
|
|
|
Ratings of |
|
At March 31, 2009 |
|
Notional |
|
|
% |
|
|
Attachment |
|
|
March 31, |
|
|
Maturity (Years) |
|
|
Number of |
|
|
Junior Tranches(c) |
|
Exposure Portfolio |
|
Amount |
|
|
of Total |
|
|
Point(a) |
|
|
2009(b) |
|
|
To First Call |
|
|
To Maturity |
|
|
Transactions |
|
|
% Rated |
|
|
Average Rating |
|
|
|
(In billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denmark |
|
$ |
33.50 |
|
|
|
37.10 |
% |
|
|
9.40 |
% |
|
|
|
% |
|
|
0.80 |
|
|
|
30.50 |
|
|
|
3 |
|
|
|
100 |
% |
|
AAA |
France |
|
|
25.10 |
|
|
|
27.80 |
|
|
|
8.60 |
|
|
|
|
|
|
|
0.90 |
|
|
|
31.00 |
|
|
|
5 |
|
|
|
100 |
|
|
AAA |
Germany |
|
|
7.90 |
|
|
|
8.80 |
|
|
|
24.40 |
|
|
|
0.50 |
|
|
|
1.50 |
|
|
|
43.30 |
|
|
|
8 |
|
|
|
83 |
|
|
AAA |
Netherlands |
|
|
19.30 |
|
|
|
21.40 |
|
|
|
17.70 |
|
|
|
|
|
|
|
0.80 |
|
|
|
7.90 |
|
|
|
3 |
|
|
|
94 |
|
|
AAA |
Sweden |
|
|
4.40 |
|
|
|
4.90 |
|
|
|
16.70 |
|
|
|
|
|
|
|
0.80 |
|
|
|
30.80 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
90.20 |
|
|
|
100.00 |
% |
|
|
13.30 |
% |
|
|
|
|
|
|
0.90 |
|
|
|
25.50 |
|
|
|
20 |
|
|
|
92 |
% |
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Expressed as a percentage of gross transaction notional amount of the referenced obligations. |
|
(b) |
|
Represents realized losses incurred by the transaction (defaulted amounts less amounts
recovered) from inception through March 31, 2009 expressed as a percentage of the initial
gross transaction notional amount. |
|
(c) |
|
Represents the weighted average ratings, when available, of the tranches immediately junior
to AIGFPs super senior tranche. The percentage rated represents the percentage of net
notional amount where there exists a rated tranche immediately junior to AIGFPs super
senior tranche. |
Note 15 Shareholders Equity and Earnings (Loss) Per Share, page 293
|
2. |
|
Please refer to prior comment 29. Sections 2 and 9 of Amendment No. 2 to the Credit
Agreement appear to indicate that the decrease in the borrowing capacity and the increase
in the term of the agreement occurred concurrently upon the issuance of the Series D
Preferred Stock. Accordingly, it appears that these modifications increased your borrowing
capacity from $170 billion to $300 billion, which if true would not appear to support a
write-down of the associated prepaid commitment fee under EITF 98-14. Please explain in
more detail your basis for recognizing the $7 billion of additional amortization in the
fourth quarter of 2008, including the specific accounting literature on which your
conclusion was based. |
AIG Response
Accelerated Amortization in the Fourth Quarter of 2008
Consideration of Applicable Literature
AIG determined that the Credit Agreement has some important and unique features, including
elements of both term debt and a revolving credit arrangement, mandatory repayments which
reduce borrowing capacity, and indications that the arrangement constituted more than a single
transaction. As a result, AIG concluded that no single accounting pronouncement addresses all
of these unique features. AIG considered the guidance provided by Emerging Issues Task Force
Issue No. 98-14, Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements (EITF 98-14), Emerging Issues Task Force Issue No. 96-1 and Debtors Accounting
for a Modification or Exchange of Debt Instruments (EITF 96-19), in reaching its conclusion as
to the accounting treatment to be applied.
10
EITF 98-14
EITF 98-14 addresses the accounting by a debtor for changes in lines of credit or revolving
debt arrangements. During the course of the period leading up to, and the months subsequent to
Amendment No. 2, AIG reviewed the terms of the Credit Agreement to determine whether it was the
type of line of credit or revolving debt arrangement that was contemplated by EITF 98-14 for
purposes of determining the appropriate accounting for Amendment No. 2. There are several
features of the Credit Agreement that distinguish it from the main features of a line of credit
or revolving debt agreement identified in paragraph 1 of EITF 98-14, as enumerated below:
|
§ |
|
AIG has the option to make multiple borrowings up to a specified maximum
amount, subject to satisfaction of certain conditions, including the value of
pledged collateral being satisfactory to the NY Fed. |
|
|
§ |
|
Unless written consent is obtained, AIG is required (not at its option) to use
proceeds obtained from Asset Sales, Equity Issuances and the issuances of debt
to repay the borrowing and reduce the maximum credit available (Mandatory
Repayments). Certain other transactions require repayments but do not reduce the
Credit Facility, and other repayments are at AIGs option and do not reduce the
maximum credit available. |
|
|
§ |
|
AIG has a limited ability to reborrow. AIG cannot reborrow under the Credit
Agreement as the maximum credit available is reduced, dollar for dollar, for
Mandatory Repayments associated with Asset sales, Equity Issuances and the
issuance of debt. This reduces AIGs ability to reborrow under the same contract
at the same original capacity. AIG can reborrow if the payments are not
Mandatory Repayments. |
Several other factors weighed into AIGs judgment as to the applicability of EITF 98-14. These
were:
|
§ |
|
Consistent with the AIGs announced divesture plan, AIG anticipated substantive asset
sales transactions, and expected that the credit available under the Credit Facility
would continuously decline with repayments from those asset sales, further reducing the
ability of AIG to reborrow the full notional amount of the capacity. The simplistic,
formulaic approach highlighted in EITF 98-14 therefore was deemed to be not applicable
in this regard as borrowing capacity in substance under the Credit Facility did not
reflect the product of term times the line available. |
|
|
§ |
|
While the term was increased to five years, AIG continued to believe that
approximately two years was the best estimate for repayment. The term was extended
primarily to instill market confidence. AIG did not deem five years to be a realistic
assessment of the period of time that the Credit Facility would be outstanding. This
was consistent with AIGs projections for repayment at that time. |
11
AIG believes that the provision for the automatic reduction in the maximum credit available
resulting from Mandatory Repayments that limit AIGs option to reborrow clearly distinguishes
the Credit Agreement from the type of agreements contemplated in EITF 98-14. Because this
unique feature would cause the actual maximum credit available under the Credit Facility to
decrease over time, the application of the mathematical formula in EITF 98-14 would not
represent the form or the substance of the Credit Facility. EITF 98-14 simply assumes
modifications to a credit line always result in the constant ability to borrow, repay and
reborrow over the remaining term of the amended arrangement. As a result, because AIG believes
that the traditional measure of borrowing capacity under EITF 98-14 does not incorporate these
unique substantive features of the Credit Agreement, and the underlying model for determining
whether any commitment fee asset should be written off also did not seem to contemplate such
features, AIG concluded that EITF 98-14 could not be literally applied to modifications to the
Credit Facility in these specific facts and circumstances.
Additionally, the fact that the $40 billion Mandatory Repayment in this case, notwithstanding
the amendment to increase the term of the Credit Agreement, would have separately resulted in a
decrease to the borrowing capacity of the line, further complicated the pure application of
EITF 98-14 in this particular situation.
EITF 96-19
Although the Credit Facility has some of the features of a line of credit or revolving
instrument, AIG considered that the limited ability to reborrow, following certain Mandatory
Repayments, reducing the maximum credit available, caused the Credit Facility to have certain
characteristics of term debt, which does not allow for amounts to be repaid and then
reborrowed. AIG therefore considered whether EITF 96-19 was applicable to Amendment No. 2.
Paragraph 2 of EITF 98-14 acknowledges that it is unclear how to apply the EITF 96-19 cash flow
calculation to arrangements in which amounts may be outstanding and the lender is committed to
lend additional amounts. AIG believes that the ability to repay and reborrow (except in
Mandatory Repayment situations) clearly distinguishes the Credit Facility from term debt
arrangements of EITF 96-19, which lack this feature. The practice issue that led to the need
to issue EITF 98-14 also affected AIGs ability to apply EITF 96-19 to Amendment No. 2.
In addition, AIG has received waivers from the NY Fed with respect to proceeds from certain
Asset Sales so that the net proceeds would not reduce the commitment under the Credit Facility.
AIG views the granting of such waivers as another indication that borrowings pursuant to the
Credit Agreement are not primarily term debt, as such waivers would somewhat negate the term
features of the Credit Facility. These waivers, however, have concerned only small asset sales.
Approach Applied By AIG
12
As a result of the foregoing, AIG concluded that Amendment No. 2 could not be addressed by
simply applying the models in EITF 98-14 or EITF 96-19, because the arrangements had elements
of both term debt and a line of credit arrangement. AIG applied judgment in considering the
substance of these unique sets of facts and circumstances. This concept is supported by the
guidance in EITF 96-19 that states that if a debt instrument contains contingent payment terms,
judgment should be used to determine the cash flows. Considering that the model in EITF 98-14
was developed to support the EITF 96-19 model for revolving credit agreements, it is reasonable
that judgment is required to determine the appropriate model when a credit agreement is a
hybrid arrangement that features term and revolving debt elements.
Additionally, when considering the situation at the time, AIG identified sequencing as an
issue. In other words, the issuance of the Series D Fixed Rate Cumulative Perpetual Preferred
Stock (Series D) required the automatic pay down of the borrowing under the Credit Facility.
Had this been the only transaction, a reduction of $40 billion in the maximum credit available
under the Credit Facility would have resulted in a pro-rata write down of the prepaid
commitment fee asset under AIGs accounting policy. Given the unique circumstances, AIG then
considered how to weigh the fact that there were two separate agreements, negotiations, and
counterparties involved (the NY Fed and the Treasury), and that the Series D issuance could
have occurred independent of Amendment No. 2 to the Credit Agreement. Moreover, AIG considered
that both parties of the US government were negotiating to continue their support of AIG, and
both the Seies D issuance and Amendment No. 2 were executed contemporaneously.
In AIGs view, the intent of the arrangements was not necessarily an extension of the term
of the arrangements for the purposes of increasing the capacity, but rather to instill
confidence in the market, facilitate an orderly disposition plan, maximize asset values, and
stabilize and maintain ratings. This was accompanied by a Mandatory Repayment that,
notwithstanding Amendment No. 2, independently reduced the borrowing capacity of the
arrangements. This intent factored into AIGs assessment of the substance of the arrangement.
AIGs approach, as contemporaneously documented, was to recognize a partial write-down to
reflect that an accounting event had occurred when the payment was made and the amount
available under the Credit Facility was reduced. The basis for the conclusion is that the
concurrent repayment was not an amendment of the Credit Agreement, but was an application of
pre-existing terms, which survived the amendment. The result of that repayment, had it occurred
apart from the amendment (before or after), would have been a reduction to the size of the
Credit Facility, which in accordance with Companys stated policy would have triggered a
write-down of a portion of the prepaid commitment fee asset.
After concluding that an accounting event had occurred, AIG considered the appropriate
amount of the write-down to be recognized. In doing so, AIG considered the substance of the
changes resulting from Amendment No. 2. Amendment No. 2 reduced the effect of the
13
$40 billion
Mandatory Repayment on the size of the Credit Facility from a $40 billion
reduction to a $25 billion reduction. The repayment and Amendment No. 2 were designed to
have the same effective date and Amendment No. 2 was contingent upon the issuance of the
Series D. Therefore, AIG concluded that the $25 billion reduction represented the best (most
accurate and reasonable) representation of the substance of the arrangement and should be the
measure used in AIGs determination of the amount of the write-down of the prepaid commitment
fee asset, resulting in the approximately $7 billion charge to earnings. AIG also considered
the Concepts Statement No. 6 that indicates that assets represent future economic benefits and
that the reduction in the maximum credit available due to the repayment required a write-down
of the associated prepaid commitment fee asset. Finally, AIG also considered Industry practice
that a partial write-down can be appropriate in certain circumstances.
Given the unique attributes of the Credit Agreement and the absence of accounting
literature that encompasses all features of the debt arrangement, the application of the
appropriate accounting literature to this transaction requires judgment and a careful review of
the substance of the arrangement. As with all matters regarding the exercise of accounting
judgment, AIG contemporaneously explored various alternatives, including the fact that such
alternatives might result in outcomes with zero or larger charges from the amortization of the
prepaid commitment fee asset. AIG, in consultation with its independent accountants, exercised
professional accounting judgment in reaching the conclusion that acceleration in amortization
of approximately $7 billion of the prepaid commitment fee asset was most representationally
faithful to the substance of the transactions with the two parties the Treasury and the NY
Fed. This result, in AIGs view, appropriately considers the unique features of the Credit
Agreement that cause a variance from the direct application of a single accounting model to the
circumstances.
The decision to apply the approach described above was reached after AIG devoted
substantial time in careful consideration of the related guidance, consulting internally for
different perspectives and with its independent accountants and after careful consideration of
alternative views.
AIGs Amortization Period
In a call with the Staff on May 27, 2009, the Staff questioned why AIGs accounting policy
for the prepaid commitment fee utilizes a period beyond the approximately two year expected
life even though AIG did not view the extension of the term in Amendment No. 2 as substantively
adjusting the expected life of the Credit Facility. The Staff also indicated that AIGs
amortization policy and disclosures should be more aligned.
Analysis
AIG appreciates that there may be various reasonable approaches to the amortization of the
prepaid commitment fee, and believes that the method it has applied represents one of those
reasonable approaches. An approach suggested by the Staff would be to amortize the prepaid
commitment fee over a two year period (representing the expected life of the Credit Facility),
while still recognizing the acceleration effects of mandatory pay downs, which is
14
similar to
AIGs accounting policy, except that the prepaid commitment fee is being
amortized over the five year contractual term. AIGs amortization period was chosen in
recognition of its asset disposition plan and the legal term of the contract, as discussed
below under Consideration of Applicable Literature.
AIG not only believes that both of these methods are reasonable, but given AIGs
expectations with respect to the timetable of its asset dispositions and Mandatory Repayments
at the time of Amendment No. 2, AIG also believes that both methods would result in the prepaid
commitment fee being fully written off over approximately two years. Specifically, AIGs
contemporaneous documentation at the time of Amendment No. 2 illustrated that AIG anticipated
the line to be paid down and the prepaid commitment fee to be written off over an approximate
two year period, albeit at different rates within the two year period. Both methods recognize
the acceleration effect of the Mandatory Repayments, as shown in the table below. AIG believes
its method appropriately matches the remaining asset with the amount of the line outstanding at
any point in time. This is most evident in the amount of amortization to be recognized in the
fourth quarter of 2010, where AIG estimated the final pay down amount will comprise
approximately 31 percent of the $60 billion total line available at December 31, 2008
consistent with the timing of transactions expected to occur in the fourth quarter of 2010, as
shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
Amortization over |
|
Amortization over |
|
|
5 years accelerated |
|
2 years accelerated |
(in millions) |
|
in pay down periods |
|
in pay down periods |
Q3, 2008 |
|
|
|
|
|
|
|
|
Q4, 2008 |
|
$ |
8,800 |
|
|
$ |
9,400 |
|
Q1, 2009 |
|
$ |
800 |
|
|
$ |
2,000 |
|
Q2, 2009 |
|
$ |
6,500 |
|
|
$ |
6,500 |
|
Q3, 2009 |
|
$ |
2,100 |
|
|
$ |
2,300 |
|
Q4, 2009 |
|
$ |
1,800 |
|
|
$ |
1,700 |
|
Q1, 2010 |
|
$ |
600 |
|
|
$ |
800 |
|
Q2, 2010 |
|
$ |
300 |
|
|
$ |
600 |
|
Q3, 2010 |
|
$ |
300 |
|
|
$ |
600 |
|
Q4, 2010 |
|
$ |
3,000 |
(a) |
|
$ |
300 |
|
|
|
|
|
|
|
|
|
|
Total 2008 |
|
$ |
8,800 |
|
|
$ |
9,400 |
|
Total 2009 |
|
$ |
11,300 |
|
|
$ |
12,500 |
|
Total 2010 |
|
$ |
4,200 |
|
|
$ |
2,300 |
|
|
|
|
|
|
|
|
|
|
Remaining
prepaid
commitment
fee asset |
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
(a) |
|
Represents acceleration due to the expected final pay down. |
15
As the table above demonstrates, the timeframe for amortization is similar under both
methods, as would be expected based on AIGs expectations for repayment of the Credit Facility.
However, should AIGs expectations for asset sales and, therefore, repayments differ from the
two-year time frame (for example, beyond two years due to market conditions), the current
methodology would provide for a remaining asset after two years to recognize the continuing
value of the Credit Facility, whereas the alternative methodology would result in no remaining
asset after the two-year period.
Consideration of Applicable Literature
AIGs accounting policy appropriately takes into consideration the five-year legal term of
the Credit Agreement, the economic substance of the arrangement by requiring accelerated
amortization as credit availability on the line diminishes, and the uncertainty that exists
should expectations of the asset dispositions and future pay downs change over time. The
combination of periodic and accelerated amortization is a dynamic method that is consistent
with the hybrid nature of the Credit Facility as previously described.
Existing accounting literature supports AIGs position of respecting the contractual term
when amortizing such costs, as follows:
|
§ |
|
While AIG does not believe that the Credit Facility represents a traditional
line-of-credit or revolver contemplated by EITF 98-14, amortization over the
contractual term of the arrangement is supported by EITF 98-14 which addresses a
borrowers accounting under a revolving credit facility. The EITF states (in paragraph
1) that in most situations, a debtor incurs costs to establish a line-of-credit or
revolving debt arrangements, and some or all of the costs are deferred and amortized
over the term of the arrangement. Additionally, EITF 98-14 states (in paragraph 4 (b))
that when there has been a change in borrowing capacity, any remaining fees under
lines-of-credit be deferred over the term of the new arrangement. Additionally, while
the Credit Facility does not represent term debt, it does have elements that are
similar to callable term debt. APB 21 (in paragraph 15) states that debt issue costs
for term debt are required to be amortized over the life of the debt. |
|
|
§ |
|
Amortization over the contractual term is also consistent with accounting literature
addressing a lenders recognition of the amortization of capitalized net fees on
revolving line of credit loans, as discussed in Statement of Financial Accounting
Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases (FAS 91) paragraph
20 (b). |
Notwithstanding the contractual term of the Credit Facility, AIGs best judgment at the
time of Amendment No. 2 was that the expected mandatory repayments would reduce the total
credit available and therefore accelerate the amortization, resulting in full amortization of
the remaining within approximately two years. Further, AIG expects that the preponderance of
the repayments will represent Mandatory Repayments under the Credit Agreement rather than
voluntary repayments, which result in revolver-like credit capacity.
16
Disclosure
After considering the Staffs feedback, AIG has evaluated its disclosures and intends to
expand its disclosures as part of its Form 8-K filing to revise the financial statements
included in AIGs 2008 Form 10-K to reflect the retrospective application of FAS 160.
Specifically, AIG would add the following language under Note 1(s) Other Assets on page
214 of the 2008 Form 10-K in Part II, Item 8. Financial Statements and Supplementary Data as
follows:
Based on AIGs estimates of the timing of the proposed transactions with the NY Fed and
the United States Department of the Treasury, as well as other contemplated transactions that
will give rise to mandatory repayments, AIG estimates that the total credit available will be
reduced to zero and, thus the asset will be fully amortized over approximately two years from
the date of the restructuring of the Fed Facility. However, should such transactions occur at
times or at values other than those currently estimated by AIG, the prepaid commitment fee
asset could be fully amortized either sooner or later than estimated.
Summary
AIG chose its amortization policy because of the hybrid nature of the arrangement with the
NY Fed, because it best reflects AIGs expectations of what will occur regarding Mandatory
Repayments as contemporaneously documented at the time, and because it is supportable by the
accounting literature. The combination of periodic and accelerated amortization is a dynamic
method that is consistent with the hybrid nature of the Credit Facility and respects both the
legal term of the contract and AIGs expectations regarding the estimated life of the Credit
Facility. Accordingly, AIG believes that its amortization policy is aligned with the accounting
treatment applied in the fourth quarter of 2008 with respect to Amendment No. 2 to the
agreement and the use of the Series D proceeds.
* * * * *
Thank you for your consideration of our responses. If you have any questions or require any
additional information, please do not hesitate to contact me at (212) 770-5123.
Very truly yours,
/s/ Kathleen E. Shannon
Kathleen E. Shannon
Senior Vice President, Secretary & Deputy General Counsel
17
cc: |
|
Frank Wyman, Staff Accountant
Carlton Tartar, Accounting Branch Chief
(Securities and Exchange Commission)
David Herzog
Joseph Cook
(American International Group, Inc.)
Robert W. Reeder III
Ann Bailen Fisher
(Sullivan & Cromwell LLP) |
18