Nation’s largest insurer races to raise capital after being hit by credit raters.
NEW YORK (CNNMoney.com) — Shares of American International Group tumbled Tuesday as the company scrambled to raise as much as $75 billion to keep itself afloat.
The pressure on the nation’s largest insurer reached fevered pitch on Monday night as the troubled insurer was hit by a series of credit rating downgrades.
The cuts could prove deadly to AIG (AIG, Fortune 500), forcing it to post more than $13 billion in additional collateral.Shares were down 42% in early morning trading, after falling more than 70% in early morning trading and losing 61% of their value the day before.
Late Monday night, Moody’s Investors Service and Standard & Poor’s Ratings S ervices each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company’s ability to raise cash is “extremely limited” because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.
The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement, citing AIG’s July 31 estimates. Also, the moves will make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.
Analysts say the company must unveil its restructuring plan soonest. So far, the company has not made any statements beyond that it is exploring alternatives.
“Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy,” said Rob Haines, analyst at CreditSights.
If AIG were to fail, the global ripple effects would be unprecedented, said Robert Bolton, managing director at Mendon Capital Advisors Corp. It has $1 trillion in assets and operates in 130 countries.
AIG is a major player in the credit default swaps market, an insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.
“If AIG fails and can’t make good on its obligations, forget it,” Bolton said. “It’s as big a wave as you’re going to see.”
The grim assessments came after a day in which state and federal officials raced to help the insurer gain access to much needed cash. The company has lost more than $18 billion in the past nine months.
AIG did not immediately reply to a request for comment on the late-night downgrades. Earlier in the day, spokesman Nicholas Ashooh told CNNMoney.com the company is “still evaluating alternatives.”
New York State gave Manhattan-based AIG the power to transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations, said Gov. David Paterson.
“It is simply giving AIG in effect the ability to provide a bridge loan to itself,” said Paterson, stressing the company is financially sound and that no taxpayer dollars are involved.
Meanwhile, the Federal Reserve asked Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) to make $70 billion to $75 billion in loans available to AIG. However, any discussions are very preliminary, a source close to the matter told CNNMoney.com.
Also, the Fed has hired Morgan Stanley (MS, Fortune 500) to examine alternatives for AIG and determine whether the government should help the insurer, a source said.
JPMorgan and the Fed declined to comment, while Goldman and Morgan Stanley did not immediately return requests for comment.
Shares plummet 61% Monday
Wall Street had expected AIG to issue a restructuring plan Monday that would address its capital crunch and boost investor confidence. But the company, a component of the benchmark Dow Jones industrial average, remained silent.
Investors punished the stock, sending it down 61% to close at $4.76 Monday. The company, which has been rocked by the subprime crisis, has seen its stock price fall more than 91% so far this year.
The restructuring plan was expected to include the sale of assets. The ailing company, which had planned to announce a turnaround strategy on Sept. 25, is being forced to accelerate the announcement after investors fled the stock last week.
The company is likely to sell its personal insurance and annuities businesses and the aircraft leasing unit, wrote Joshua Shanker, a Citigroup analyst, who believes the company might have to mark down another $30 billion in assets.
“We believe AIG will survive, but we have little indication of how many business lines will ultimately need to be sold and how dilutive to shareholders future capital raising efforts will be,” Shanker wrote.
AIG, which already raised $20 billion in fresh capital earlier this year, has been pummeled by three quarters of huge losses and writedowns.
Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.
AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.
The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia.
But the company has many attractive businesses it could sell to raise capital, he said.
This year’s results have also included $12.2 billion in pretax writedowns, primarily because of “severe, rapid declines” in certain mortgage-backed securities and other investments.
AIG has struggled all year as the Wall Street credit crunch took its toll.
In June, the company tossed out its chief executive, Martin Sullivan, who had been charged with turning the company around after directors removed longtime CEO Hank Greenberg in 2005. Greenberg was the target of one of then-Attorney General Eliot Spitzer’s investigations.
The board named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), to replace Sullivan as chief executive officer.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 16, 2008: 10:48 AM EDT