AIG Liquidity: Worse than Expected?

Just days ago, the shaky company seemed to be looking for a mere $40 billion.

The whopping amount of the Federal Reserve’s authorization to lend as much as $85 billion to American International Group has at least one securities analyst firm wondering if the insurance giant’s cash shortfalls are far worse than expected.

“The size of the credit facility suggests that the liquidity/capital needs at AIG may be substantially greater than we had estimated,” according to a report issued by Credit Suisse Securities this morning.

That amount–just days ago, reports suggested that the insurer was looking for a bridge loan of $40 billion–implies “that a considerable amount of the total value of AIG’s businesses may not go to current debt or equity holders, but rather to repay the Fed’s term loan.”

Indeed, on Monday, AIG got the go-ahead to begin tying up a chunk of its decently performing insurance assets. New York Gov. David Paterson authorized the AIG group’s ailing parent company to swap for up to $20 billion in more liquid assets from its subsidiaries in order to post them for collateral “to provide liquid cash to allow day-to-day operations of the company.” Paterson acknowledged that that would allay only a portion of the company’s liquidity woes. How the state’s authorization will be affected by the Fed’s loan is unclear.

In its statement at 9 PM last night, the fed said that “the loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.” For its part, the company’s board spoke of the loan as “giving AIG the time necessary to conduct asset sales on an orderly basis,” it said in a statement this morning. AIG officials could not be reached at presstime.

Analysts are wondering, however, whether sale of “certain assets” will really mean selling “most” or “all” of the multinational’s numerous units. To Credit Suisse, the Fed’s comment that the company will pay off the loan with the proceeds it gets from selling its businesses “suggests that the majority of the company may be sold off in pieces. This is a staggering development, that the formerly largest global insurance company will potentially be unwound through a 1 to 2 year auction process.”

UBS analysts were a bit less downbeat about the company’s prospects for survival. To be sure, UBS said in a note this morning, the terms of the loan would tie up essentially all of AIG’s assets, including the assets of its key non-regulated subsidiaries and its stock in its regulated units, as collateral.

But the two-year term of the Fed loan gives the company enough time to conduct asset sales in an orderly way, thus “averting fire sale prices and giving AIG greater flexibility to retain its most strategically valuable properties, according to UBS. Capital infusion coming on the heels of the loan could also boost the recently fallen financial strength ratings at AIG’s core insurance subsidiaries, “which could help stem the reputational/credibility damage” to the company overall, according to the securities firm.

To Gimme Credit’s Kathleen Shanley, however, the 24 month term isn’t all that lengthy. “Some issues can’t be put back into Pandora’s box,” she wrote in a report issued by the research firm today. Earlier this week, two of the company’s non-insurance subsidiaries, American General Finance and International Lease Finance Company, were downgraded by rating agencies this week, she noted, adding that AGF had $3.5 billion of commercial paper outstanding at the end of June, and ILFC had $4.6 billion.

Although both AIG subsidiaries have committed bank lines, drawing them down “is never an appealing prospect,” Shanley writes. “It seems reasonable to expect AGFC and ILFC will be on the list of assets considered for sale.”

The company’s insurance subsidiaries will also be ripe for picking from fresh sources of capital, according to Credit Suisse, which noted that “there will be plenty of high-quality businesses for sale, notably international life insurance, foreign general, and the domestic retirement business.”

The firm said the it suspects that Chinese, Canadian, European, and Australian insurance would be interested in snapping up some AIG units, “along with the usual large-cap suspects domestically on both the life and [property-casualty insurance] sides.

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