American International Group Inc.’s plan to exit U.S. ownership includes a new $2 billion backstop from the Treasury Department after credit raters said the company may need emergency capital as it regains independence.
The funds will be available when the government converts its preferred stake into common stock and can be drawn through March 2012 or until AIG sells at least $2 billion in shares, the New York-based insurer said in a Sept. 30 filing. AIG must maintain investment-grade ratings to execute its plan, which hinges on selling bonds and stock to private investors as the government withdraws support.
The 2008 bailout of AIG has been revised four times, swelling to $182.3 billion, in part to prevent rating downgrades that would trigger payments from AIG on mortgage-linked derivative contracts and hurt the firm’s ability to attract insurance buyers. Moody’s Investors Service, Fitch Ratings and Standard & Poor’s have been criticized by lawmakers for giving top grades to housing-linked bonds before that market collapsed.
“By doing things like demanding more capital, rating firms have become the de facto regulator of AIG,” said Jonathan Hatcher, a Jefferies Group Inc. analyst in New York and a former Federal Deposit Insurance Corp. bank examiner. “This is very much a negotiation between AIG, the government and the rating agencies, and no one in that room wants egg on their face.”
The facility was created to address rating firms’ concerns that AIG could be pressed for cash after the U.S. withdrawal begins in the first quarter, said two people with knowledge of the plan. AIG will owe a 5 percent dividend to Treasury on the funds, which are carved out of an existing bailout line. AIG paid 10 percent on Treasury’s initial preferred stake and was then permitted to skip dividends as the bailout was revised.
“What do you do if something adverse were to happen in between the time the government winds down its support and the company fully completes its restructuring plan?” said Julie Burke, managing director at Fitch. Treasury’s commitment “is a step to provide liquidity coverage during this interim period.”
AIG, once the world’s largest insurer, protects property owners against natural disasters including hurricanes and earthquakes. Mark Herr, an AIG spokesman, and Mark Paustenbach, a Treasury spokesman, declined to comment.
The four main insurance rating firms, which include A.M. Best Co., affirmed their grades of AIG after the announcement last month of the company’s restructuring plan. Standard & Poor’s rates AIG’s debt at A-, which is five levels higher than it would be without federal support.
Moody’s said that while the plan was a sign of progress, it raised the risk that the U.S. exits before AIG is ready. The firm “could become vulnerable if it does not fully revitalize its core operations and substantially exit non-core businesses before parting ways with the government,” Bruce Ballentine of Moody’s said in an Oct. 4 note.
AIG has to “restore shareholder confidence, particularly with institutional investors, and demonstrate its ability to maintain sufficient liquidity,” according to a Sept. 30 note from A.M. Best. The $2 billion Treasury line is a “bridge” to an equity offering from the insurer, the ratings firm said.
“Concerns about rating downgrades drove government policy in regard to AIG,” Elizabeth Warren, then-chairman of the Congressional Oversight Panel, wrote in June. “That this small group of private firms was able to command such deference from the federal government raises questions about their role within the marketplace and how effectively and accountably they have wielded their power.”
Rating firms provide judgments on how a debt issuer’s actions may impact their credit grades, said Burke of Fitch and Ballentine of Moody’s. Fitch “gives our opinions and highlights any positives or shortcomings but we don’t set terms, all we do is provide our opinion,” Burke said.
Ballentine said that Moody’s analysts “are observers, and we make credit judgments on steps the company has taken.”
The facility will be created when Treasury converts its $49.1 billion investment in AIG into common stock for sale to the public, the company said.
As part of the restructuring, AIG will retire its Federal Reserve credit line, using sale proceeds of two non-U.S. divisions, AIA Group Ltd. and American Life Insurance Co. AIG will use as much as $22 billion from an existing Treasury line to help cover separate Fed obligations.
To repay remaining commitments, AIG may use additional funds from the sale of AIA, Alico, and a pair of Japan insurers. MetLife Inc. has agreed to buy Alico for about $15.5 billion, Prudential Financial Inc. struck a deal to acquire the Japan units for $4.8 billion, and AIA is planning a public offering in Hong Kong.
If necessary, AIG will also repay the U.S. with proceeds from sales of its Taiwan unit, plane-leasing business and stakes in mortgage-linked bonds contained in separate bailout funds.
The insurer was first rescued in September 2008 by the Fed after rating downgrades triggered collateral payments to trading partners. Its bailout included a $60 billion Fed credit line, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by AIG.
Rating firms may have downgraded AIG if the government hadn’t restructured its bailout in November 2008 and again in March 2009 to improve AIG’s liquidity, Treasury Chief Restructuring Officer Jim Millstein said in May. Concern about rating actions also constrained the government’s ability to demand discounts from AIG’s trading partners as they wound down derivatives, he said.
Downgrades below investment grade would have been a “death knell” to AIG’s ability to sell policies, Millstein said.
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