American International Group was forced to seek federal help Sept. 15 to avoid bankruptcy because it became caught up in a vicious cycle of rating downgrades, Standard & Poor's said in a research paper.
After downgrades, purchasers of AIG's short-term commercial paper, which is used by companies use to finance their day-to-day cash needs, were beginning to decline to roll over AIG's loans causing a credit crunch, said S&P.
The firm's analysts said at the same time banks were beginning to stop the company from drawing on the backup credit lines that purchasers of commercial paper require before they will do business with a counterparty.
S&P said the day AIG's acute problems developed S&P and other rating agencies had lowered AIG credit ratings, "which resulted in a further modest requirement [for further collateral on its credit default swaps], which, we believe, would have used up the company's available cash."
Moreover, the S&P analysts said they believe that "additional declines in the values of mortgages underlying the company's CDSs would have resulted in further collateral calls."
Among other observations in the research paper, the S&P analysts said they don't believe AIG will need to borrow the full $85 billion available through the credit facility being provided by the Federal Reserve Board.
However, as of today, CNBC said AIG has drawn $44.6 billion from the credit facility. This was an increase from the $30 billion Credit Suisse said Wednesday that AIG had drawn from the facility.
At the same time, S&P said in the research paper that, "S&P Ratings Services believes that AIG has adequate capacity to pay back all borrowings under this facility, given the more orderly time frame [provided by the FRB loan] to address its liquidity needs and assess the value of its underlying businesses."
The analysts also said they don't expect a full liquidation of AIG, but that it might be forced to "sell some core assets."
On a positive note, S&P analysts said they believe the FRB loan the creation of the Fed borrowing facility "halted the possible further deterioration of the group's financial strength."
For this reason, the analysts said, "we raised our short-term ratings on AIG to 'A-1′ from 'A-2′ following the announcement of the facility because the company's ability to borrow up to $85 billion on a secured basis substantially enhances its liquidity."
The analysts said the "The strong ratings continue to reflect the very strong and diversified nature of AIG's global insurance franchise across a vast range of insurance products.
"AIG has unique expertise in many markets and products, which helps to cement its position with key global clients," the analysis said.
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