Rating Agencies Upgrade AIG, But Remain Cautious

Standard & Poor’s and Fitch raised their credit ratings for AIG on Wednesday in the wake of the Federal Reserve Board’s action to provide the troubled firm with liquidity, but both remain cautious about how the company’s future will ultimately play out.

Both watchdog firms warned that they will be monitoring the situation closely because of the uncertainty associated with the terms of the government’s two-year bridge loan to AIG.

Specifically, S&P said that it raised its short-term counterparty ratings on AIG, its financial guarantee subsidiaries and its International Lease Finance Corp. unit to “A-1” from “A-2.” It also lowered the ratings on various subsidiaries’ preferred shares to “B” from “BBB.”

S&P analysts said the ratings on the preferred shares remain on “CreditWatch-negative” because of the “increased risk of deferral of dividend payments due to the right of the U.S. government to veto dividend payments.”

The “BBB/A-3” counterparty credit rating on American General Finance Corp. is unchanged. The outlook is “negative.”

For its part, Fitch analysts said its “evolving” rating is “intended to communicate the highly dynamic nature of AIG’s current financial situation, which could evolve positively or negatively for different subsidiaries or securities.”

Fitch analysts added that their expectation is that it may revise ratings, outlooks or watches on individual securities’ ratings or specific legal entities within the AIG group, “as it furthers its analysis and more details become available.” Such actions could occur at any time, Fitch said.

S&P analysts said most of the AIG ratings are on “Creditwatch-developing” in order to “reflect the significant uncertainty in the near term as to any impact of recent events on AIG and its ability to attract and retain business, as well as uncertainty as to which businesses might be sold to repay AIG's borrowings from the Fed.”

An S&P credit analyst, Rodney A. Clark, explained that "it is likely that the ratings on AIG and its various subsidiaries will move in different directions as these facts become clearer and strategic alignment within the insurance operations is more defined."

He added that S&P’s “ratings on the preferred shares remain on ‘Creditwatch-negative’ because of the right of the U.S. government under the terms of the agreement to veto dividends on any preferred shares.”

Any action on that right is uncertain, but could occur with little warning at the government's discretion, he noted.

Fitch analysts said they think AIG’s “most pressing” challenges are evolving from meeting immediate liquidity needs to managing higher financial leverage, and related pressures on fixed-charge coverage likely to arise as a result of draws on the Fed’s credit facility.

“To provide funds needed to service debt obligations, Fitch believes that AIG will likely sell a significant number of its operating company subsidiaries, and that these sales may include subsidiaries that Fitch had previously viewed as core operations,” Fitch analysts said. “AIG needs to optimize operating company results under very difficult market conditions in order to retain significant value in its subsidiaries that may be monetized in the future.”

The Fitch analysts said they think any subsidiary would be considered for sale, “and the ratings impact for any subsidiary that is ultimately sold would be greatly influenced by the credit quality of the buyer and terms of the sale.”