AIG Sales May Not Repay U.S. Loan, Forcing New Deal (Update2)

By Hugh Son
Bloomberg News
November 6, 2008

Nov. 6 (Bloomberg) -- American International Group Inc., (AIG) the insurer taken over by the U.S. government, may have to renegotiate terms of its $85 billion rescue as the company struggles to find buyers for some of its units.

"It may make sense and be pragmatic for the government to renegotiate,'' said David Havens, a UBS AG credit analyst in Stamford, Connecticut. The loan's interest rate "makes it extraordinarily difficult for AIG to fix itself,'' he said.

Chief Executive Officer Edward Liddy has yet to announce the sale of a business after saying in September he might disclose transactions that month. New York-based AIG got an $85 billion loan on Sept. 16 to stave off bankruptcy and two additional U.S. credit lines totaling $58.7 billion last month to make up for further losses. AIG owed $83.5 billion on Federal Reserve credit lines as of last week, a figure scheduled to be updated today.

AIG probably will report a third-quarter net loss of $3.84 billion on Nov. 10, the fourth straight unprofitable period, according to five analysts surveyed by Bloomberg. The company, which originates, insures and invests in home loans, was squeezed for cash after posting about $48 billion of write-downs and unrealized losses from the collapse of the subprime loan market since the beginning of last year. AIG shares have plunged more than 95 percent since Dec. 31.

Industrywide Slump

While losses mount at AIG, the company's competitors have less buying power because of lower stock prices and the increased cost of borrowing. The Standard & Poor's 500 Index has dropped 26 percent since the end of August and the cost of borrowing dollars for three months in London was 2.51 percent as of yesterday, 1.5 percentage points more than the Federal Reserve's target interest rate for overnight bank loans.

"Clearly, we'd prefer to be doing this asset sale a year ago or two years ago than right now, but there'll be plenty of excellent demand for what are really good assets,'' Liddy said Oct. 22 in a PBS interview.

AIG spokesman Joe Norton and Andrew Williams, a spokesman for the Federal Reserve Bank of New York, declined to comment. The insurer slipped 7 cents, or 3.4 percent, to $1.99 at 9:48 a.m. in New York Stock Exchange composite trading.

Liddy, 62, plans to sell life insurance operations in the U.S., Europe and Japan, along with the firm's reinsurer, airplane lessor, consumer finance unit and asset manager, leaving what he called a "nimbler'' company.

Under Pressure

AIG, once the world's largest insurer, could raise $115 billion by disposing of all its units, Thomas Gallagher, an analyst at Credit Suisse Group AG, estimated in September. Sales prospects fell the next month as shares of U.S. life insurers dropped about 44 percent on concern investment losses would sap capital.

"Confidence in the sector has come under considerable pressure,'' Nigel Dally, a New York-based analyst at Morgan Stanley, said in an Oct. 27 note.

Taxpayers may lose money unless the AIG bailout is restructured to reduce the need for quick sales, said shareholders including former CEO Maurice "Hank'' Greenberg, who controls the largest block of privately held AIG stock.

The current plan "cannot be successfully accomplished'' because of the "crippling combination of declining asset values and extremely poor market conditions,'' Greenberg wrote in an Oct. 30 letter to Liddy.

The government should buy non-voting preferred stock with an annual dividend of 5 percent to 6 percent to replace the loan, Greenberg said in an Oct. 13 letter to Liddy. Under terms of the Sept. 16 credit line, AIG must pay principal, fees and annual interest of more than 8.5 percent within two years.

`Greater Opportunity'

"If they just let AIG work through their issues over a lengthier period of time, it would provide the government with a greater opportunity to recover its capital,'' UBS analyst Andrew Kligerman said in an interview. "The current market is putting pressure on AIG's assets, on its insurance properties and on buyers.'' Kligerman has a "neutral'' rating on AIG.

Standard & Poor's said yesterday in a statement that the credit ratings of AIG's property and casualty units, which Liddy intends to keep, may be downgraded because of price competition and possible investment losses.

"Competitors are actively pursuing AIG's accounts and key underwriting personnel,'' S&P said.

AIG agreed in September to turn over an 80 percent stake to the U.S. after running short of cash because credit-rating downgrades forced the insurer to post more than $10 billion in collateral to clients who bought protection on bonds.

Collateral Damage

The contracts, called credit-default swaps, plunged in value as the assets they guaranteed declined. AIG sold protection on $441 billion of fixed-income investments, including $57.8 billion in securities tied to subprime mortgages, as of June 30.

The insurer also lost money on investments made using collateral from securities it loaned to third parties. AIG said Oct. 8 it can get as much as $37.8 billion in cash from the Fed to pay off its securities-lending partners. AIG then got access to another $20.9 billion under the Federal Reserve's commercial paper program designed to unlock short-term debt markets, the firm said Oct. 30.

Liddy named former Safeco Corp. CEO Paula Rosput Reynolds on Oct. 23 to lead AIG's restructuring. She previously steered Safeco through its $6.2 billion sale to Liberty Mutual Group Inc.

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