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Monday, 2 March 2009

AIG Restructuring

Two points stand out from the AIG restructuring as described in a document issued by the company (can be found here).

First of all the “Improved terms of existing preferred investment”, sound as though they are improved for AIG, but not for the US tax payer who sees his preferred shares reduced to ordinaries.

Second the restructuring looks more like a break up:

“As a result, AIG is redirecting the divestiture process away from relying solely on immediate sales for cash and will use a greater variety of tools to maximize the value of the individual businesses. The U.S. Treasury, the Federal Reserve, and AIG have taken actions that will allow AIG to achieve a complete restructuring over the next several years through a process that protects policyholders, continues to reduce risk, and produces strong, focused franchises that can operate as independent entities”

Can a slimmed down AIG justify the same credit rating? Is it not time for a downgrade and another banking shock because of the capital implications?

AIG said today that another downgrade by ratings agencies would trigger $8 billion in collateral and termination payments to counterparties and warned that without extra funding from the government or other sources it could become insolvent. A one-notch downgrade to Baa1 by Moody's Investors Service and BBB+ by Standard & Poor's would allow AIG's trading partners in derivatives and other markets to demand the extra payments, according to a regulatory filing with the Securities and Exchange Commission. A two-notch downgrade to Baa2 by Moody's and BBB by S&P would force AIG to come up with another $2 billion in collateral and termination payments.

Do the rating agencies take the consequences of a downgrade into account when computing the rating? It is clearly a material factor in whether the company is likely to meet future obligations.

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