The emergency loan and the recent announcements that American International Group plans to sell off some of its assets (See related articles) doesn’t seem to have impressed the rating agencies. Both A.M. Best and Standard & Poor’s Ratings Services have issued announcements indicating that they intend to keep AIG’s ratings on their review, or ‘CreditWatch’, list with negative outlooks.
Best said that all its financial strength ratings, issuer credit ratings and debt ratings on AIG “are unchanged and remain under review with negative implications,” despite the plans to sell off “many of its businesses, including domestic personal auto, International Lease Finance Corporation, AIG’s domestic life and retirement services and certain foreign life operating units including ALICO.”
S&P said it has revised the CreditWatch status of its ratings on AIG’s non-insurance operations, currently ‘A-/A-1’ to negative from developing. However, S&P said that “the ratings on most of AIG’s insurance operating subsidiaries remain on CreditWatch with developing implications.”
S&P also noted: “The ‘A-/A-1’ counterparty credit rating on AIG relies on the significant support from the $85 billion borrowing facility provided by the Federal Reserve Bank of New York. The facility provides liquidity, allowing the company and its subsidiaries to meet debt and other obligations while it implements its plan to sell various businesses.”
However, credit analyst Rodney A. Clark stated: “The $61 billion draw to date on the facility is much larger than we had previously anticipated. This has caused the scope of the planned business sales to exceed our expectations.”
Best observed that, despite AIG’s high profile announcements of asset sales and plans to focus on U.S. commercial and foreign general P/C insurance, “there are as yet no named buyers or post-acquisition balance sheets representing the remaining businesses, and any timing delays could have unforeseen effects, which causes A.M. Best to be unwilling to revise ratings and/or the under review status at this time.”
In addition Best noted that “near-term profitability should not be expected to be as robust given policyholders seeking to diversify some risk away from AIG, decline in benefits emanating from current reduction in market confidence, continuing soft market conditions and the change in perceived value in the implicit and explicit support of AIG, which will no longer be a diversified conglomerate with very significant financial flexibility.”
Best added that it “maintains heightened sensitivity to the possibility of erosion of franchise value and employee departures, which would have a detrimental impact to profitability. Noteworthy, the Federal Reserve and insurance regulators have an atypical but decided interest in supporting AIG to achieve its goals.”
On a more reassuring note Best said that in its opinion, AIG’s core P/C operations “currently maintain adequate surplus and policyholder security, and it is anticipated that management as well as insurance regulators will look to ensure this continues.” However, Best also said it “remains concerned regarding the consolidated AIG disposition of troubled assets supporting securities lending and matched investment programs, third quarter 2008 results as well as operating and financial leverage.”
The rating agency also sees both an upside and a downside to the deal with the Fed. Some prime operating units are expected to be sold, which “are premier opportunities for interested parties to garner significant quality market share quickly.” Many of AIG’s operations would be hard to duplicate.
However, the fly in the ointment is the current credit crunch. AIG’s deal with the Fed requires asset sales to be cash transactions. Best said it “believes that competition for asset sales may be challenged by the lack of credit availability in current volatile markets and potential reluctance of bidders to raise cash through stock dilution.”
In explaining its decision S&P said that AIG’s ratings and those of its guaranteed subsidiaries “are on CreditWatch negative to indicate that there could be downward pressure because of our view of the risks around the execution of the plan as well as the heavy debt-service requirements of a much smaller and less-diversified AIG.”
S&P echoed Best’s concerns about potential financial market problems, observing that the “current disruption in the credit markets could make it difficult to sell businesses at attractive valuations.”
Both rating agencies expressed hope that over the longer term AIG’s own actions coupled with further government intervention and support – notably the recently passed Emergency Economic Stabilization Act (also known as the $700 billion bailout) – would result in a stronger, if smaller, company.
When the picture becomes clearer, both Best and S&P will reexamine AIG’s ratings.
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