Thursday, September 30, 2010

AIG Plans to Repay Government a Neutral, Rating Agencies Say

Rating agencies are saying that American International Group’s plan to repay the U.S. government in full is a neutral.

Earlier today, the troubled insurer, based in New York, announced that it has entered into an agreement-in-principle with the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the AIG Credit Facility Trust designed to repay its obligations.

The three part plan includes:

--Repaying and terminating the FRBNY credit facility with AIG. Today, according to the company, AIG owes the FRBNY approximately $20 billion in senior secured debt under the facility. AIG expects to use resources from its parent as well as proceeds from the disposition of its assets to pay off the debt. The dispositions would include the public offering of its Asian life insurance business including American International Assurance Company Ltd. (AIA), and the pending sale of its foreign life insurance company American Life Insurance Company (ALICO) to MetLife, Inc.

--Facilitating the orderly exit of the U.S. government’s interests in two special purpose vehicles that hold AIA and ALICO totaling approximately $26 billion. The exit will be executed by drawing down up to $22 billion of undrawn Series F funds available to the company under the Troubled Asset Relief Program (TARP) to purchase an equal amount of the FRBNY’s preferred interests in the SPVs. AIG will then immediately transfer these preferred interests to the U.S. Treasury as part of its consideration for the Series F preferred shares. AIG also will apply proceeds from future asset monetizations, including the announced sales of the AIG Star Life Insurance Co. and AIG Edison Life Insurance, to retire the remainder of the FRBNY’s SPV preferred interests. When these transactions are completed, AIG expects that it will haverepaid the FRBNY in full.

To retire the U.S. Treasury’s preferred interests in the SPVs, AIG will apply the proceeds of future asset monetizations, including its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife closes.

--Retiring AIG’s remaining TARP support and Series C preferred shares which amounts to approximately $49.1 billion. Under the plan, the U.S. Treasury is expected to receive approximately 1.655 billion shares of AIG common stock in exchange for the $49.1 billion of TARP Series E and Series F preferred shares and the Series C preferred shares currently held by the AIG Credit Facility Trust. In addition, AIG will issue up to 75 million warrants with a strike price of $45.00 per share to existing common shareholders. Upon the exchange, the U.S. Treasury will own 92.1% of the common stock of AIG. The exchange will not be executed until the FRBNY credit facility is repaid in full. After the exchange is completed, it is expected that over time the U.S. Treasury will sell its stake in AIG on the open market.
AIG expects to repay and terminate the FRBNY credit facility and complete the issuance of common stock to the U.S. Treasury before the end of the first quarter of 2011, subject to regulatory approvals and other closing conditions.

Standard & Poor’s Ratings Services, New York, issued a statement saying that its ratings on American International Group Inc. (AIG; A-/Negative/A-1) and AIG's insurance subsidiaries (most of which are rated A+/Negative/--) are not affected by the company's announced recapitalization plan. However, S&P added that although the ratings on AIG and its operating subsidiaries are unchanged, the announcement is a positive credit development.

The announcement, according to S&P, is a favorable development for AIG's long-term unsecured creditors which will probably result in an upgrade of its stand-alone credit assessment of AIG to 'BBB+' from 'BB' upon the successful execution of the American International Assurance IPO and the completion of the Alico divestiture.
Other positives cited by the rating agency include: AIG’s continued improvement in its overall liquidity position through its successful wind-down of AIG Financial Products and the reduction of other contingent liquidity needs. In addition, S&P says that it expects that the removal of the uncertainty surrounding the parent should boost AIG's insurance operations' competitive position, which we consider strong, and should lead to improved profitability over the longer term.

S&P added that although we believe AIG's recapitalization plan mitigates the execution risk associated with the government repayment, concerns surrounding overall operating performance remain. The rating agency says it will likely address the ratings on both AIG and its insurance operations by early 2011 following our review of third-quarter operating performance and discussions with AIG on its updated enterprise risk management programs.

Separately, S&P has issued a ‘Hold’ recommendation on AIG stock, noting that “Given the complicated nature of AIG's bailout, we view positively today's announced plan, which includes a mechanism to repay the Federal Reserve Bank of N.Y., but actually increases the U.S. Government's common equity stake in AIG to 92%, diluting existing shareholder interests.

“We also note that recently announced asset sales have included writedowns to goodwill, and therefore we still believe common stock investors should focus on tangible equity, which was a negative $38.92 at 6/30/10. Our $43 target price (raised $3) assumes the shares trade below stated book value, according to S&P analyst Catherine Seifert.

A.M. Best Co., Oldwick, N.J., announced that AIG’s issuer credit rating of ‘bbb’ is unchanged following the insurer’s announcement. The ratings of all AIG subsidiaries are also unchanged. Best explained that “while the specific details of the plan are now being made public, it has been the expectation since the initiation of the government’s involvement that such involvement would not be permanent. As such, the announcement of this final plan is not itself a trigger for rating action by A.M. Best.”

Best noted that while these actions will streamlined and strengthened balance sheet with reduced debt, the company’s ratings have been based on U.S. government support and going forward, AIG will have to stand on its own. It will need to re-establish itself with the capital markets; restore shareholder confidence, particularly with institutional investors, and demonstrate sufficient liquidity when it no longer has government support.

Moody’s Investors Service, New York, affirmed the company’s long-term ratings as well as the ‘Aa3’ insurance financial strength ratings of Chartis U.S. and the A1 IFS ratings of SunAmerica Financial Group (SFG). The rating outlook for these entities remains negative, reflecting the risk that the government would conclude its ownership and support of AIG before the company achieves a full recovery of its core operations and an exit from or de-risking of noncore businesses.

Additionally, the Prime-1 short-term ratings of AIG and of certain guaranteed subsidiaries have been placed on review for possible downgrade in light of the proposed elimination of government funding commitments that the company announced it would conclude in its plan.

"The proposed repayment plan signals AIG's progress in stabilizing its core insurance operations and exiting noncore businesses," said Bruce Ballentine, Moody's lead analyst for AIG. "It also points the way toward a sustainable capital structure." On the other hand, the plan hastens the end of explicit government support for AIG, which has been an important consideration in the company's ratings. While the announced plan would involve the government retaining significant ownership of AIG, at least in the near term, Moody's believes that the ownership stake and implicit support will decline over the next couple of years. Therefore, the ratings of AIG and its subsidiaries will increasingly depend on their
stand-alone credit profiles, raising the risk of downgrades if the credit metrics do not improve as expected. "The current ratings also reflect our expectation that AIG will maintain sufficient capital and liquidity to withstand severe stresses in the insurance and financial markets following the removal of government funding facilities," said Ballentine.

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