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AIG Move to Pay Down U.S. Debt Seen Good for Bondholders

Source: Dow Jones Wire

Posted on 14 Sep 2009

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American International Group Inc. (AIG) reduced its Federal Reserve indebtedness slightly in recent weeks, which one analyst calls a step in the right direction.

CreditSights Inc. analyst Rob Haines said in a Thursday note that he sees "ample asset coverage for senior bondholders," as AIG's "hemorrhaging" begins to subside. AIG's remaining businesses hold enough value to repay its government bailout with something left over for bondholders, he said. AIG's small reduction of its existing Fed debt is a positive step.

Some equity analysts aren't as optimistic, and investors had a bearish view Friday, sending the shares down 30 cents to $37.55.

On Friday, Wells Fargo equity analysts cut their rating on AIG's shares to underperform from market perform, and Standard and Poor's equity research reaffirmed its sell rating.

Some of AIG's Fed balances are falling, Haines said. The Fed's credit line to AIG fell about $4.2 billion since the end of the second quarter, to $38.9 billion at September 9, according to a Fed report issued Thursday.

Balances are also falling in two special-purpose units called Maiden Lane II and Maiden Lane III, set up by the Fed to buy illiquid mortgage-backed loans from units of AIG.

Maiden Lane II was set up in the fourth quarter to purchase illiquid residential mortgage-backed securities from AIG life insurance units' securities lending portfolios. At the end of the second quarter, AIG estimated it had $19.49 billion to repay. By September 9, the amount due the Fed dropped to $16.79 billion.

AIG owed the Fed $24.34 billion at the end of the second quarter for Maiden Lane III, which was set up in 2008 to purchase collateralized debt obligations from mostly investment-bank counterparties of AIG's financial-products unit. On September 9, the amount due had fallen to $19.84 billion.

The total amount of support provided by the government to AIG totaled $180.09 billion at the end of the second quarter, according to AIG's figures. In addition to the Maiden Lane units and Fed credit agreement, AIG received an investment from the U.S. Treasury's Troubled Asset Relief Program.

After an analysis of AIG's current capital structure, CreditSights' Haines said Thursday that AIG's "operating fundamentals are slowly normalizing [and] the remaining swap book is performing in-line with expectations," which puts bondholders in good shape.