AIG Ratings Downgraded by Fitch and S&P: Needs Capital
Yesterday, I posted that AIG (NYSE:AIG) was barely holding on to their AA- rating. Now that’s gone:
The pressure on troubled insurer American International Group intensified Monday night as a credit rating agency downgraded the firm.
Another cut could prove very costly to AIG, which is scrambling to raise much-needed capital.
Fitch Rating downgraded AIG to A, from AA-, saying the company’s ability to raise cash is “extremely limited” because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.
The company could be required to post $10.5 billion of additional collateral if it is downgraded one notch by one of the other major rating agencies and $13.3 billion of collateral if downgraded by both, Fitch said in a statement, citing AIG’s July 31 estimates.
AIG downgrade could prove costly (CNN Money)
Unfortunately, S&P has also chosen to downgrade the company (but only its counterparty rating):
American International Group Inc.’s long-term counterparty rating was cut to A- from AA- by Standard & Poor’s.
The U.S. rating company in a report cited a “combination of reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses.”
S&P also lowered AIG’s short-term counterparty credit rating to A-2 from A-1+, and cut its counterparty credit and financial strength ratings on most of AIG’s insurance operating subsidiaries to A+ from AA+. The ratings remain on watch for a possible further downgrade, S&P said.
AIG Rating Cut to A- by S&P; Remains on Watch Negative (Bloomberg)
With the New York Times reporting that “if AIG does not raise cash and is downgraded by ratings agencies, it may have only 48 to 72 hours to survive” some kind of deal needs to be announced by tomorrow before things take a turn for the worse.
AIG’s management should have released a clear plan for asset sales to raise capital today, but they did not. Rather, they chose to announce that they were granted the ability to use subsidiary assets as collateral, to try to keep functioning. Now reports are circulating that Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) will be leading an effort to grant AIG $70-75 billion in loans to help support the company. So far these measures have faced difficulty. Like with Lehman Brothers (NYSE:LEH), parties simply do not want to loan money without the backing of the government:
AIG has also held discussions in recent days with private-equity firms about providing an infusion of cash. But some firms balked at putting in money absent a Fed bridge loan, and at this point, private-equity firms such as TPG and Kohlberg Kravis Roberts & Co. are more interested in buying specific AIG assets rather than contributing money to a capital infusion, according to people familiar with these firms’ thinking.
The company also talked with Warren Buffett, chairman of Berkshire Hathaway Inc. which has a number of insurance businesses. The talks didn’t result in specific plans, and it wasn’t clear if they were ongoing.
AIG Seeks Huge Loan As Stock Dives 61% (WSJ)
The situation appears as if management at AIG is hoping to keep the company totally intact by securing large commitments of capital in the form of a bridge loan or some kind of support from the Fed. On the other hand, private equity firms and Buffett are offering AIG cash, but only for specific business units. This logic is very typical of Buffett, he has no reason to bail out AIG because he does not want or need the whole company. He is looking for good businesses run by good people, which means only certain groups within AIG.
The game AIG’s management is playing right now, by not committing to any quick deals, seems akin to the style employed by the management of Lehman Brothers this weekend. We know how that turned out. Maybe these guys will smarten up and start making some more practical decisions.
