On November 10, 2008, the Federal Reserve
Board and the U.S. Treasury Department announced the
restructuring of the government’s financial support
to the American International Group, Inc. (AIG) in
order to facilitate its ability to complete its restructuring
process. As part of this restructuring, under section
13(3) of the Federal Reserve Act, the Federal Reserve
Board authorized the Federal Reserve Bank of New York
(New York Fed) to lend up to $30 billion to a newly formed
Delaware limited liability company, Maiden Lane III
LLC (ML III LLC), to fund the purchase of certain multi-sector
collateralized debt obligations (CDOs) from certain
counterparties of AIG Financial Products Corp. (AIGFP).
Transaction Overview
ML III LLC was formed in the fourth quarter of 2008. ML
III LLC borrowed approximately $24.3 billion from the
New York Fed in the form of a senior loan (Senior Loan).
The Senior Loan proceeds, after adjustments (totaling $0.3 billion between October 31, 2008 and December 31, 2008) including principal and interest payments received by AIGFP counterparties on the CDOs, together with an equity funding of approximately
$5.0 billion provided by AIG (Equity Contribution Amount),
were used to purchase from certain third-party counterparties
of AIGFP certain U.S. dollar denominated CDOs (Asset
Portfolio) with an estimated fair value as of October 31, 2008, of approximately
$29.6 billion. The counterparties agreed to sell CDOs to ML III LLC in
exchange for a purchase payment from ML III LLC and their retention of collateral
previously posted by AIGFP under the related credit derivative contracts, for
an overall consideration of par. In connection with any such purchase,
each AIGFP counterparty agreed to terminate the related credit derivative contracts
between such counterparty and AIGFP.
The purchase of the Asset Portfolio took place in
two stages, with a portion settling on November 25,
2008, and the remaining portion settling on December
18, 2008. In connection with the purchases of CDOs by
ML III LLC and the termination of the related credit derivative
contracts, AIGFP’s
counterparties were paid $26.8 billion and AIGFP was
paid $2.5 billion pursuant to an agreement between
AIGFP and the New York Fed. The $2.5
billion represented the amount by which the value of
collateral surrendered by AIGFP for termination of
the credit derivative contracts exceeded the contracts’ fair
value as of October 31, 2008.
As of October 31, 2008,
the Asset Portfolio had a par value of approximately
$62.1 billion.
The New York Fed has all material control rights
over the Asset Portfolio and is the managing
member of ML III LLC.
Significant Transaction Terms
The Senior Loan is secured by the Asset Portfolio.
The Senior Loan was issued with a stated term of
six years, and may be extended at the New York Fed’s
discretion.
The interest rate on the Senior Loan is
one-month LIBOR plus 100 basis points. After
the Senior Loan to the New York Fed has been repaid in full
plus interest, to the extent that there are sufficient
remaining cash proceeds, AIG will be entitled to repayment
of the Equity Contribution Amount, plus accrued interest
at a rate of one-month LIBOR plus 300 basis points.
After
repayment in full of the Senior Loan and the Equity
Contribution Amount (each including accrued interest),
any remaining proceeds will be split 67% to the New
York Fed and 33% to AIG.
Distribution of the proceeds
realized by the Asset Portfolio (including interest
proceeds and proceeds from the maturity or liquidation
of the Asset Portfolio) will occur on a monthly basis,
and will be made in the following order (each category
must be fully paid before proceeding to the next lower
category):
- first, to pay any costs, fees and expenses
of ML III LLC then due and payable;
- second, to pay any amounts due and payable
to any counterparty for any permitted hedging transactions;
- third, to fund the expense reimbursement
sub-account to $500,000 or such other amount as may
be specified by the New York Fed;
- fourth, to fund the investment reserve
sub-account up to an amount determined by the New York Fed;
- fifth, to pay the outstanding principal
amount of the Senior Loan;
- sixth, so long as the entire outstanding
principal amount of the Senior Loan has been repaid
in full in cash, to pay unpaid interest outstanding
on the Senior Loan accrued at LIBOR plus 100 basis
points;
- seventh,
so long as the entire outstanding principal
amount and all accrued and unpaid interest outstanding
on the Senior Loan have been paid in full, to pay the
outstanding principal amount of the Equity Contribution
Amount;
- eighth, so long as (i) the entire outstanding
principal amount of and all accrued and unpaid interest
outstanding on, the Senior Loan have been repaid
in full and (ii) the Equity Contribution Amount has
been repaid in full, to pay unpaid interest outstanding
on the Equity Contribution Amount at LIBOR plus 300
basis points;
- ninth, so long as the
entire outstanding principal amount of and all accrued
and unpaid interest outstanding on the Senior Loan
and the Equity Contribution Amount have been paid
in full to pay any amounts due and payable to any
counterparty pursuant to any permitted hedging transactions
to the extent not paid under clause second above;
- tenth,
so long as the entire outstanding principal amount
of and all accrued and unpaid interest outstanding
on the Senior Loan and Equity Contribution Amount
have been paid in full and there are no outstanding
amounts due and payable to hedge counterparties, to
pay 67% of all remaining amounts to the New York Fed and
33% of all remaining amounts to the holder of the Equity
Contribution Amount (each a Contingent Interest).
Management of Assets
BlackRock Financial Management Inc. (Investment Manager)
has been retained by the New York Fed to manage the Asset
Portfolio.
The Investment Manager’s objective
in managing the Asset Portfolio is maximization of
long-term cash flows to pay the Senior Loan (including
principal, interest, and Contingent Interest) subject
to the need to meet other obligations in the waterfall
that are senior to the Senior Loan and refraining
from investment actions that would disturb general
financial market conditions.
Other than assets that may be acquired by ML III LLC
as part of a portfolio liquidation of one or more CDOs
held by ML III LLC, cash proceeds from the Asset Portfolio
may be invested solely in U.S. Treasury or agency securities
with a remaining maturity of one year or less, U.S. 2a-7
government money market funds, reverse repurchase agreements
collateralized by U.S. Treasury and agency securities
and dollar denominated deposits.
Board and Treasury Department Announce Restructuring of Financial Support to AIG 
AIG
Loan Facility »
ML
III LLC Annual Financial Statements, year ended December 31, 2008 
Summary of Assets and Outstanding Principal Balance of Senior Loan and Equity Contribution
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