Four agencies cut AIG's ratings on Monday night, which exerted more pressure on the Federal Reserve to put together an emergency loan package to help the company meet anticipated demands from counterparties today for additional collateral prompted by the downgrades.
After a full day of negotiations, the Federal Reserve Board provided up to $85 billion in financing to the troubled carrier in return for nearly 80 percent equity in the firm.
As for the rating agency actions:
o Standard & Poor's cut its AIG rating to "A-minus" from "AA-minus."
o Moody's downgraded AIG's senior unsecured debt rating to "A2″ from "Aa3."
o Fitch slashed its long-term financial strength benchmark to "A" from "AA-minus," and its senior unsecured debt to "A" from "AA-minus."
o A.M. Best Company downgraded AIG's financial strength rating to "A" (Excellent) from "A-plus" (Superior), and its issuer credit ratings to "A" from "AA" on the domestic life and retirement services subsidiaries of American International Group Inc. In addition, A.M. Best downgraded the financial service ratings on AIG's domestic property-casualty insurance subsidiaries to "A" from "A-plus" (Superior) and issuer credit ratings to "A" from "AA-minus."
The loan fund that was desperately sought by the troubled carrier will be used by AIG in part to provide collateral to its derivatives counterparties if the trading partners demand it, according to several financial industry officials.
AIG saw its financial stability undermined by the financial tsunami triggered by the end of a bubble in the housing market, and the resulting severe decline in mortgage-backed securities held by financial firms, which were guaranteed by AIG through credit default swaps.
It is this part of AIG's business–not its principal global insurance and auto and airplane leasing units–that is struggling financially.
In an effort to provide further cash to AIG, New York state insurance regulators on Monday allowed AIG to move up to $20 billion in capital from its insurance subsidiaries to the parent firm. With the Federal Reserve loan deal, that move might no longer be necessary.
In a note issued overnight, analysts at Bank of America–which acquired Merrill Lynch on Monday–said that while AIG's holding company is getting caught up in the growing financial crisis, its underlying businesses are solvent.
"There is significant tangible value in the company's core insurance operations," the analysts said.
"In our view, AIG is facing near-term liquidity issues, as opposed to solvency issues," prompted by demands that AIG's financial unit mark its credit default swaps to market, the BOC analysts said.
"However, rolling over the maturing debt at AIG may now be an additional source of liquidity stress," the analysts warned, noting that New York's decision to allow AIG's insurance subsidiaries to lend its corporate parent up to $20 billion "addresses some of the liquidity issues, but does not seem to resolve it," noting that the rating agencies may look negatively at the plan.
(This story was updated at 1:01 p.m. EDT, and again on Sept. 17 at 8:00 a.m. EDT.)
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