Standard & Poor’s Ratings Services said Monday that it is keeping its ratings on American International Group Inc. (‘AA+/Watch Neg/A-1+’) and AIG’s subsidiaries on CreditWatch with negative implications, where they were placed on March 15.
Recently, there has been increased market speculation about larger charges to GAAP shareholders’ equity, which resulted from AIG’s internal probe into questionable financial transactions and widening spreads in the credit derivative swap market.
Most AIG ratings were lowered to ‘AA+’ from ‘AAA’ on March 30, 2005, following AIG’s announcement that the newly appointed executive team uncovered a number of questionable transactions that needed to be investigated further and established expectations that the filing of the 10-K would likely be made by April 30, 2005.
The preliminary impact of the findings was estimated to be $1.7 billion after taxes (about 2% of shareholders’ equity). Barring any material restatement of its consolidated financial statements or additional material governance issues, Standard & Poor’s indicated that the counterparty credit, financial strength, and senior debt ratings were not likely to fall further, especially in light of the strong, diversified
operational cash flows.
As the scope of the internal and external investigations broadens and the time horizon for its completion lengthens, concerns grow that the financial impact of preliminary findings might have been underestimated.
“Even if the preliminary estimate turns out to be as much as 100% too low, Standard & Poor’s expects to affirm the ‘AA+’ financial strength ratings because of the insurance operations’ strong, diversified market position and revenue generating-capabilities,” said
Standard & Poor’s credit analyst Grace Osborne. “However, in such a scenario, it is less certain that the counterparty credit and senior debt ratings on American International Group Inc. and its guaranteed subsidiaries would be maintained at the same level as the financial strength ratings on the insurance companies.”
Standard & Poor’s assessment of the absolute level of earnings available for debt servicing, historically viewed as extremely strong (15x-30x), and its consistency over long periods could be weakened. Factors (individually or in combination) that would adversely alter Standard & Poor’s view of earnings capacity would be additional material governance issues, a large charge-off of previously recorded
revenue and earnings, the emergence of operational earning’s volatility as accounting techniques to smooth earnings are eliminated, increased strain on future earnings for historical losses, and the full financial and operational impact of recent accounting practices as they translate into regulatory penalties and fines and increased litigation costs.
Standard & Poor’s plans to resolve the CreditWatch status of the ratings shortly after the filing of the 10-K by AIG.
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