American International Group Inc. (AIG) on Monday announced an agreement with the U.S. Treasury Department and the Federal Reserve to restructure and refocus its core business, potentially with the aid of additional government funds. The Treasury said it will exchange the existing $40 billion in preferred shares for new preferred shares under terms that will be revised “to more closely resemble common equity and thus improve the quality of AIG’s equity….” The Treasury has also promised up to $30 billion in exchange for non-cumulative preferred stock through a new and upcoming equity capital facility. “The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally,” the Treasury said in a joint media statement with the Fed. “The additional resources will help stabilize the company, and in doing so help to stabilize the financial system.” The Fed said it would also participate in the restructuring effort, reducing the $60 billion revolving credit facility set up back in September for AIG in exchange for up to $26 billion in preferred stock interests — “based on valuations acceptable to the New York [Federal Reserve Bank]” — in the two special purpose vehicles AIG will create to hold outstanding stock of American Life Insurance Co. (ALICO) and American International Assurance Co. (AIA). The Fed said it would also make up to $8.5 billion in new loans to special purpose vehicles (SPVs) established by domestic life insurance subsidiaries of AIG. These loans would be repaid through net cash flows received by the SPVs from designated blocks of life insurance policies. The Fed said after these steps, the revolving credit facility would be reduced from $60 billion to no less than $25 billion. The interest rate on the facility would also be altered, the Fed said, from the existing three-month LIBOR plus 300 basis points. The existing floor — 3.5 percent — on the LIBOR rate would be removed, and the facility would continue to be secured by a lien on “a substantial portion” of assets held by AIG, according to the Fed. The Treasury and the Fed have said AIG must comply with the executive compensation and corporate government restrictions set forth in the Emergency Economic Stabilization Act. “AIG is executing one of the most extensive corporate restructuring programs in history at a time when the global economy and capital markets are in turmoil,” said chairman and CEO Edward Liddy in a media statement on the restructuring movement. “While we have made meaningful progress, we have concluded, along with Treasury and the Federal Reserve, that additional tools are needed to enable success. The measures announced today provide the necessary U.S. government support for a plan to establish separate capital structures, including outside ownership, for certain AIG companies.” AIG announced it was forming AIU Holdings Inc., a General Insurance holding company composed of its Commercial Insurance Group, Foreign General unit and other property and casualty operations. The company will boast a board of directors, management team and brand distinct from that of parent AIG. The company also announced it would position ALICO and AIA as independent operations, with their equity contributed into the SPVs that will allow for the repayment of additional government aid put into AIG. “Given the importance of ALICO and AIA to repaying our obligation to the U.S. government, we think this structure is the optimal solution to maintain the value of these businesses and best position them to enhance their franchises,” Liddy said. The restructuring announcement came within moments of the release of the company’s fourth-quarter and year-end earnings statement. AIG posted a loss of $61.7 billion — $22.95 per share — in the fourth quarter, for a total net loss of $99.3 billion — $37.84 per share — for the full year 2008. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.