November 10, 2008 4:38 PM

Davis Polk, Sullivan & Cromwell on Latest AIG Refinancing

Posted by Zach Lowe

Another month, another new rescue package for AIG, the struggling insurer that has ties to so many collateralized debt obligations and mortgage-backed securities that the government has decided it simply cannot be allowed to collapse.

The firms advising on this deal also worked as on last month's $40 billion emergency loan -- which itself followed the government's initial $85 billion infusion. Davis, Polk & Wardwell advised the U.S. Treasury Department and the Federal Reserve Bank of New York, and Sullivan & Cromwell advised AIG.

The latest bailout actually reduces the original $85 billion credit line down to $60 billion in exchange for a new set of terms. The main points, per the New York Times Deal Professor and Bloomberg

• AIG gets a $40 billion capital injection in the form of a preferred stock purchase, on which the government is to receive a 10 percent dividend.

• AIG gets about $52 billion in exchange for its most toxic assets, which will then be placed into new limited liability corporations. The first of the new entities will hold about $35 billion worth of AIG-insured collateralized debt obligations--most of which are currently held by institutional investors--against default (AIG must contribute $5 billion to the CDO entity). The second new entity will hold about $22.5 billion of mortgage-backed securities.

• Executive bonuses and golden parachutes are severely restricted.

• The government is lowering its original credit line from $85 billion to $60 billion. AIG will also pay a much lower interest rate on that loan -- about 5.5 percent compared to the 11 percent the original agreement demanded, the Times says.

The two sides have been hammering out this complicated agreement since September. That's probably meant a lot of long nights for Davis Polk partners Marshall Huebner, Ethan James, Bradley Smith, Robert Heckart and Bjorn Bjerke. The lawyers declined comment.

Sullivan's chairman H. Rodgin Cohen and partner Mithcell Eitel have been advising AIG in its talks with the government for several months. The firm declined to comment on the latest AIG deal.

The news comes as AIG reports a $24.47 billion third quarter loss. The company earned about $3 billion in profits during the same period last year, the Times says.

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