MOODY'S DOWNGRADES CREDIT RATINGS OF AMERICAN GENERAL CORPORATION AND ITS FINANCE SUBSIDIARY (SENIOR DEBT TO A2 FROM A1)
New York, 6/18/1997 -- Moody's Investors Service downgraded the long term credit ratings of American General Corporation (AGC) and its consumer finance subsidiary, American General Finance Corporation (AGFC). The senior unsecured debt ratings of both enterprises were lowered to A2 from A1. The rating agency also confirmed the Prime-1 ratings of both AGC and AGFC for their commercial paper. This concludes the rating review initiated on February 19, 1997.
Moody's stated that the downgrade of AGC's rated debt is based on the view that the company's aggressive growth strategy and increased use of financial leverage have lifted the long-term risk profile of the organization for certain creditors. Moody's noted that the value created by the company's consolidation activities will more likely benefit the shareholders over the near to medium term, but that it will raise the long-term financial risks for creditors, particularly as competition intensifies across the retail financial-services landscape. AGC's consolidation activities have become essential to meet the company's return and growth objectives for shareholders, said Moody's. The rating agency acknowledges that conservatively financed acquisitions, such as the recently completed transaction with USLIFE Corporation, offer opportunities to expand distribution and products as well as driving down unit costs. Nevertheless, Moody's believes that those benefits are outweighed by the increased use of financial leverage in AGC's overall capital structure.
The rating conclusion for AGFC was driven primarily by the change in the parent company ratings and the close linkages between the two. AGC has provided support in the form of capital injections, management oversight, and shared liquidity back-up facilities -- factors that make ratings distinctions between the two entities less appropriate. This subsidiary, which is engaged in consumer finance and related credit-insurance businesses, has experienced several years of reduced earnings as it works through credit quality problems resulting from rapid growth with inadequate controls.
A number of initiatives have been undertaken to shore up the business, and the highest loss portfolios have been written down and sold, or are held for sale. The result is that the credit-quality measures on the remaining core portfolio have begun to improve. Although the worst appears to be behind AGFC, delinquencies and losses remain high. To its credit, management quickly focused on eliminating problem portfolios and on cleaning up the process, so assets have declined during the last two years. The company will be challenged in the future to resume growth and regain lost momentum and earnings potential without increasing risk.
Moody's noted that the rating outlooks for AGC and its affiliates are stable after these rating actions. That view is primarily based on the company's consistent earnings, good liquidity, and established market positions for its insurance subsidiaries.
The following ratings of American General Corporation and its subsidiaries were downgraded:
American General Corporation -- Senior debt rating lowered to A2 from A1; provisional senior debt shelf rating lowered to (P) A2 from (P) A1; provisional subordinated debt shelf rating lowered to (P) A3 from (P) A2 and provisional preferred stock shelf rating lowered to (P) "a2" from (P) "a1".
American General Capital, L.L.C. Series A and B -- Preferred stock rating lowered to "a2" from "a1"; provisional preferred stock shelf rating lowered to (P) "a2" from (P) "a1".
American General Delaware, L.L.C. -- Preferred stock rating lowered to "a2" from "a1"; provisional preferred stock shelf rating lowered to (P) "a2" from (P) "a1".
American General Institutional Capital A -- Preferred stock rating lowered to "a2" from "a1".
American General Institutional Capital B -- Preferred stock rating lowered to "a2" from "a1".
American General Finance Corporation -- Senior debt rating lowered to A2 from A1; provisional senior debt shelf rating lowered to (P) A2 from (P) A1; and long-term counterparty rating lowered to A2 from A1.
The following ratings of American General Corporation and its subsidiaries were confirmed:
American General Corporation -- Junior subordinated debt rating of A3; provisional junior subordinated debt shelf rating of (P) A3; Prime-1 rating of the company for commercial paper.
American General Capital Services, Inc. -- Prime-1 rating of the company for commercial paper.
American General Finance Corporation -- Prime-1 rating of the company for commercial paper.
CommoLoCo, Inc. -- Prime-1 rating of the company for commercial paper.
American General Life Insurance Company -- Insurance financial strength rating of Aa3.
Franklin Life Insurance Company -- Insurance financial strength rating of Aa3.
Variable Annuity Life Insurance Company -- Insurance financial strength rating of Aa2.
American General Corporation is a holding company for various operating subsidiaries providing life insurance, retirement savings, and consumer finance products. The company's headquarters are in Houston, Texas. The company reports consolidated pro forma GAAP assets of $75 billion and shareholders' equity of $6.2 billion as of March 31, 1997 following the acquisition of USLIFE.
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