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Announcement:

Moody's comments on AIG's restructuring progress; review continues

18 Dec 2008
Moody's comments on AIG's restructuring progress; review continues

New York, December 18, 2008 -- Moody's Investors Service maintains its present ratings and continues to monitor the restructuring and divestiture efforts of American International Group, Inc. (NYSE: AIG -- senior unsecured debt at A3/review down, short-term debt at Prime-1/review down), while noting that AIG has made important strides in the restructuring plan announced on November 10, 2008. In cooperation with the US Treasury and the Federal Reserve Bank of New York (the NY Fed), AIG has revised its capital structure, terminated its US securities lending program, and materially reduced its exposure to credit default swaps (CDS) written on multi-sector collateralized debt obligations (CDOs). These developments are positive in Moody's view, helping to limit future strains on AIG's liquidity and capital. Nevertheless, the company faces significant challenges in its efforts to divest non-core operations, unwind the remainder of AIG Financial Products Corp. (AIGFP) and preserve the values of major operating units. These challenges are heightened by the weak global economy and distressed financial markets.

Moody's continuing review of the ratings on AIG and its subsidiaries will focus on: (i) the firm's evolving liquidity profile, including the level of borrowing under the NY Fed's credit facility; (ii) the anticipated timing and amounts of cash proceeds generated from asset sales; (iii) development of a comprehensive plan to unwind AIGFP, including estimated costs and timing; (iv) the performance of major operating units, whether they are core operations or targeted for sale; and (v) the resulting financial profile (e.g., financial leverage and fixed charge coverage) of AIG following the asset sales. For those operations being sold, Moody's will consider their intrinsic financial strength, the Government's interim support and the rating profiles of potential acquirers. Moody's expects to resolve the AIG rating review during the first quarter of 2009.

AIG, the US Treasury and the NY Fed have largely completed all four of the transactions announced on November 10, as follows: (i) AIG issued $40 billion of redeemable perpetual preferred stock to the US Treasury under the Troubled Assets Relief Program, using proceeds to reduce borrowings under the original secured revolving credit facility provided by the NY Fed in September; (ii) AIG and the NY Fed amended this credit facility from an $85 billion two-year revolver to a $60 billion five-year revolver with more favorable pricing for AIG; (iii) AIG's US life insurance subsidiaries sold all remaining residential mortgage-backed securities from their US securities lending collateral pool to a newly formed entity called Maiden Lane II LLC (ML II), and they have terminated the US securities lending program as well as the $37.8 billion securities lending arrangement established with the NY Fed in October; and (iv) a newly formed entity called Maiden Lane III LLC (ML III) has purchased $46.1 billion of multi-sector CDOs on which AIGFP wrote CDS, and the related CDS contracts have been terminated.

ML III has entered into agreements to purchase an additional $7.4 billion of multi-sector CDOs (for a total of $53.5 billion purchased or under agreement), which will allow for termination of the related CDS contracts. Each of ML II and ML III has been funded by a large tranche of senior financing provided by the NY Fed and a smaller tranche of subordinated financing provided by AIG. Cash proceeds from the assets in ML II and ML III will be applied first to the NY Fed's senior financing and then to AIG's subordinated financing, with any additional amounts shared between the NY Fed (majority share) and AIG (minority share).

Moody's believes that AIG's revised capital structure and the ML II and ML III transactions have helped to stabilize the firm's financial flexibility. The new capital structure not only provides lower-cost and longer-term funding, but it may also give various constituents -- customers, distributors, employees, creditors, potential business buyers -- greater confidence that AIG can complete its asset sales and repay the NY Fed's credit facility within a reasonable time frame. The ML II and ML III transactions provide downside protection to AIG in terms of further price declines, losses and liquidity demands related to securities lending or to the multi-sector CDS/CDO portfolio. Moreover, the termination of the securities lending program may make the US life insurance subsidiaries more attractive to potential buyers.

Nevertheless, AIG faces significant challenges in its restructuring and divestiture efforts. Moody's believes that the pricing and timing of planned asset dispositions have been hampered by the weak global economy and limited availability of financing alternatives for potential business buyers. During the past few months, AIG's core and non-core insurance operations have seen deterioration with respect to sales and persistency of business. Moody's expects that lower business volumes combined with the costs of retaining key employees will hurt profit margins. Material delays in the divestiture process could cause significant erosion of the values of operations to be sold as well as core operations to be retained, in Moody's view.

AIG also faces the complex task of unwinding the remaining operations of AIGFP (beyond the multi-sector CDS/CDO portfolio). The costs and duration of this process are difficult to estimate and could be substantial. Moody's believes that the exposures at AIGFP represent a source of additional earnings and liquidity risk for AIG given the large and diversified derivatives book. Such exposures include CDS written for regulatory capital or corporate arbitrage purposes, where further market deterioration and/or changes in valuation methods could lead to sizable market valuation losses and collateral requirements.

Finally, AIG's ultimate capital structure, assuming completion of the global divestiture plan and repayment of the NY Fed's credit facility, would still likely include substantial debt and hybrid securities with large fixed charge requirements. Moody's believes that AIG's financial leverage and coverage metrics at that time, absent other capital raising or restructuring initiatives, would be weak for the single-A debt rating category -- perhaps very weak for that rating level if asset dispositions are completed at prices materially lower than currently expected.

Offsetting these challenges and weaknesses is the strong support demonstrated by the US Treasury and NY Fed. The Government has shown flexibility in adjusting the amount and terms of its support with changing circumstances at AIG and in the broader financial markets. The current ratings on AIG and its subsidiaries reflect Moody's expectation of continuing strong Government support, not only to fund immediate liquidity needs but also to facilitate the global divestiture plan and the unwinding of AIGFP. Without such support, the ratings of AIG and many of its subsidiaries -- including core operations and businesses identified for sale -- would be lower. Therefore, there is downward rating transition risk for AIG in the future if and when the Government support and related ownership interests are removed. At that time, the rating would be dependent on the actual proceeds realized from asset dispositions, AIG's resulting capital structure and the credit profiles of businesses retained.

AIG, based in New York City, is an international insurance and financial services organization, with operations in more than 130 countries and jurisdictions. The company is engaged through subsidiaries in General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. AIG reported a net loss of $24.5 billion for the third quarter of 2008. As of September 30, 2008, shareholders' equity was $71.2 billion (including $23.0 billion of consideration received for preferred stock not yet issued).

The last rating action took place on November 10, 2008, when Moody's commented on AIG's third-quarter 2008 results and its restructuring plan, while maintaining the ratings at the current level (senior unsecured debt at A3/review down, short-term debt at Prime-1/review down).

The principal methodologies used in rating this issuer were Moody's Global Rating Methodology for Property and Casualty Insurers and Moody's Global Rating Methodology for Life Insurers, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Rating Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to punctually pay senior policyholder claims and obligations. For more information, please visit our website at www.moodys.com/insurance.

New York
Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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