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Moody's Downgrades Two AIG Lending Units

Source: Dow Jones Wire

Posted on 03 Aug 2009

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Moody's Investors Service downgraded two American International Group Inc. (AIG) lending units to the brink of junk territory, saying that without support from the insurance giant, both would already be speculative grade.

The ratings agency lowered American General Finance Corp. and International Lease Finance Corp. by one notch each to Baa3 and their ratings were put on review for further downgrades.

For American General, Moody's cited concerns about the lender's funding profile, operating pressures and franchise value. Moody's said until recent quarters, American General, acquired by AIG in 2001, funded its operations primarily with public unsecured debt. But it supplemented that source of funding with bank loans, asset sales and securitizations due to constraints in the unsecured debt markets.

American General must repay $4.5 billion of bank debt by next July, according to Moody's, and will likely need support from its parent to maintain a minimal liquidity cushion. And while AIG hasn't sought a buyer for the company, Moody's said it believes that move would be likely in the future, resulting in uncertainty about its ownership and long-term operating and funding strategies.

The downgrade of International Lease was mostly due to concerns about the aircraft financier's long-term strategy for funding its $44 billion portfolio of commercial aircraft, assuming the firm's planned divestiture by AIG is completed. Moody's believes the unit's access to unsecured debt sources will likely be diminished, notwithstanding a recovery in the debt markets and a transfer of company ownership.

"Though ILFC's performance during the downturn has been resilient to date, our view is that higher wholesale funding risks will require that ILFC transition to financing alternatives that could limit its financial flexibility when compared with traditional unsecured sources," said Moody's analyst Mark Wasden.

AIG has been looking to pare assets and raise capital to pay back the U.S. government for its assistance. It received about $182.5 billion in bailout aid, with the government owning an 80% stake in the company.

AIG's shares were up three cents to $13.17 in after-hours trading. The stock has tanked over the past year, losing nearly all its value .