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10 Nov 2008
Moody's maintains present ratings on AIG (senior debt at A3, review down); comments on 3Q08 results and restructuring plan
New York, November 10, 2008 -- Moody's Investors Service is maintaining its present ratings on American
International Group, Inc. (NYSE: AIG -- senior
unsecured debt at A3, short-term debt at Prime-1,
on review for possible downgrade) following announcements of AIG's
large net loss for the third quarter of 2008 and of a government-supported
Moody's noted that the restructuring plan includes a large infusion
of preferred stock that would restore much of the capital lost in recent
periods, along with transactions that would limit AIG's future
losses on some of its most troublesome investment and derivative exposures.
The current ratings on AIG incorporate Moody's expectation that
the insurer will continue to benefit from strong government support while
it executes its divestiture and restructuring plan. The continuing
review for possible downgrade reflects the substantial uncertainty surrounding
(i) the value that will be received for businesses that are sold,
(ii) potential additional losses incurred during the unwinding of other
businesses, and (iii) the future performance of businesses that
are retained. Such uncertainty is heightened by the weak global
AIG reported a net loss of $24.5 billion for the third quarter
of 2008, driven mainly by net realized capital losses (mostly other-than-temporary
impairment of investments), unrealized market valuation losses on
derivatives, and other charges related to financial market turmoil
and the restructuring plan. Over the past four quarters,
AIG has reported cumulative net losses of $42.9 billion
and net unrealized depreciation on investments totaling $15.9
billion. These losses and write-downs pertain largely to
mortgage-related exposures in the credit default swap (CDS) portfolio
of AIG Financial Products Corp. (AIGFP) and in the securities lending
collateral pool of AIG's US life insurance subsidiaries.
Significant cash collateral calls and reductions/terminations of securities
borrowing arrangements have strained AIG's liquidity and capital
To help AIG meet its obligations, the Federal Reserve Bank of New
York (the Fed) provided the company with an $85 billion two-year
secured revolving credit facility on September 16, 2008.
As part of this transaction, the Fed obtained a 79.9%
equity interest in AIG. Also, on October 8, 2008,
the Fed entered into a $37.8 billion securities borrowing
facility with certain of AIG's US insurance subsidiaries.
Under the restructuring plan announced today, the Fed intends to
replace the $85 billion revolving credit facility with a $40
billion redeemable perpetual preferred stock issue and a $60 billion
five-year secured revolving credit facility, with pricing
and other terms that are more favorable to AIG than the current Fed credit
In addition to the recapitalization, AIG and the Fed have announced
a de-risking plan that would cap AIG's exposure to further
market value deterioration in its mortgage-related securities lending
collateral pool and in the multi-sector component of its CDS portfolio.
In each case, AIG would transfer these exposures to an unaffiliated
special purpose vehicle (SPV) funded by a large tranche of senior financing
provided by the Fed and a smaller tranche of subordinated financing provided
by AIG. The exposures would be transferred to the SPVs at estimated
current market values. The transaction with the securities lending
collateral pool is intended to allow for termination of AIG's securities
lending program and of the Fed's $37.8 billion securities
borrowing facility. Although AIG will crystallize substantial losses
on its mortgage-related exposures through these transactions,
the $40 billion preferred stock investment mitigates that concern,
providing significant incremental protection for senior creditors.
To repay its borrowings under the Fed revolving credit facility,
AIG is attempting to sell a broad range of businesses, including
many of its Life Insurance & Retirement Services, Financial
Services and Asset Management operations, as well as some modest-sized
General Insurance units. Remaining core operations are intended
to include the US-based Commercial Insurance Group, Foreign
General Insurance and a majority stake in American International Assurance.
Moody's said that the proposed recapitalization and de-risking
transactions will provide AIG with additional time and flexibility to
facilitate asset sales and bolster AIG's operating performance.
Terminating the securities lending pool may make the participating life
insurers more attractive to potential buyers. In addition,
the more favorable capital structure may give various constituents --
customers, distributors, employees, creditors,
potential business buyers -- greater confidence that AIG can complete
its asset sales and repay the Fed revolving credit facility within a reasonable
Moody's noted, however, that AIG faces serious headwinds,
including the weak global economy and limited availability of financing
alternatives for potential business buyers. The company also faces
the daunting task of unwinding the remaining operations of AIGFP (beyond
the multi-sector component of the CDS portfolio). The costs
and timing of this likely prolonged and complex unwinding process are
difficult to estimate, but could be substantial. Finally,
AIG's ultimate capital structure, assuming successful completion
of the global divestiture plan and repayment of the Fed revolving credit
facility, would still likely include substantial debt and hybrid
securities with large fixed charge requirements. Moody's
has estimated that AIG's financial leverage and coverage metrics
at that time, absent other capital raising or restructuring initiatives,
would be somewhat weak for the single-A debt rating.
Offsetting these challenges and weaknesses is the strong support demonstrated
by the Fed. The Fed 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 Fed 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.
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 Fed revolving credit facility; (ii)
execution of the de-risking transactions for the securities lending
pool and the multi-sector component of the CDS portfolio;
(iii) the timing and amounts of cash proceeds generated from asset sales;
(iv) development of a comprehensive plan to unwind AIGFP, including
estimated costs and timing; (v) the performance of major operating
units, whether they are core operations or targeted for sale;
and (vi) 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 as well as the rating profiles of potential
The last rating action on AIG took place on October 3, 2008,
when Moody's downgraded the senior unsecured debt rating to A3 from
A2, with a continuing review for possible downgrade, following
the announcement of AIG's global divestiture plan.
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).
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
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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