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AIG May Restructure Rescue Package for Second Time

Posted on 24 Feb 2009

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American International Group Inc. (AIG) may restructure its $150 billion rescue package for a second time in four months as the recession and slumping stock market cut the value of its assets.

AIG may convert the government’s preferred shares into common stock to reduce pressure on the company’s cash flow, a person familiar with the situation said yesterday. New York-based AIG pays a 10 percent dividend on preferred stock, and none on common shares. AIG fell in New York trading.

“Paying a huge dividend on the preferred only makes you bleed slowly over time, so this would help,” said Robert Haines, an analyst at CreditSights Inc. in New York. AIG is facing a “huge potential loss on its investment portfolio,” which could lead to credit-rating downgrades, he said.

AIG, once the largest insurer by assets, probably will report a fifth straight quarterly loss, casting further doubt on the company’s ability to repay the U.S. Executives at New York-based Citigroup Inc., previously the largest bank, also have discussed a share conversion as a way to quell capital-adequacy concerns, according to another person familiar with the matter.

Downgrades by Moody’s Investors Service and Standard & Poor’s may force AIG to post more than $7 billion in collateral to counterparties, the insurer said in a November filing. AIG’s units could also lose access to the federal commercial paper program if they are downgraded, the company said. Unprofitable insurers including Hartford Financial Services Group Inc. and Genworth Financial Inc. have already lost access to the program.

Absorbing Losses

An exchange to common shares may improve AIG’s standing with lenders and other counter-parties based on prior agreements, Haines said.

“Common equity is a stronger former of capital as it absorbs losses first,” Haines said.

Details of a new rescue package probably will be disclosed next week when AIG posts fourth-quarter results, said the person, who declined to be identified because talks with the government are private. The company may report a record fourth-quarter loss of $60 billion on the decline of investment holdings, according to another person familiar with the situation.