AIG details potential outcome of ratings downgrades on collateral posting requirements

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Related Companies American International Group (AIG)

Related Documents 10-Q American International Group 9/30/2009, filed on 11/6/2009

Related Articles 3/3/2009 Fitch, Moody's act on AIG, units 3/2/2009 S&P affirms AIG, removes ratings from CreditWatch

American International Group Inc. on Nov. 6 detailed the aggregate fair value of its derivative instruments with credit risk-related contingent features and the potential ramifications of future ratings downgrades.

The company reported in a Form 10-Q that the aggregate fair value of those derivative instruments that are in a net liability position as of Sept. 30 was about $11.2 billion, while the assets posted as collateral under these contracts had an aggregate fair value of $11.4 billion.

AIG said those features are predominantly limited to additional collateral posting requirements contingent upon an AIG credit rating downgrade, and the company said it aims to reduce credit risk with certain counterparties by entering into agreements to obtain collateral from a counterparty on an upfront or contingent basis.

As of the close of business Sept. 30, a one-notch downgrade of the company's long-term senior debt ratings to Baa1 by Moody's and BBB+ by Standard & Poor's Ratings Services would allow counterparties to make additional collateral calls and elect early termination of contracts, resulting in up to about $2.5 billion of corresponding collateral postings and termination payments.

Additionally, a two-notch downgrade to Baa2 by Moody's and BBB by S&P would result in about $1.7 billion in additional collateral postings and termination payments, and a three-notch downgrade to Baa3 by Moody's and BBB- by S&P would result in additional collateral postings and termination payments of about $1.2 billion.

Current market conditions, the complexity of the derivative transactions, historical termination experience and other observable market events such as bankruptcy and downgrade events at other companies are considered when estimating the termination payments upon downgrade, the company reported, adding that the actual termination payments could significantly differ from management's estimates.

In March, S&P affirmed its supported A-/A-1 counterparty credit rating on AIG, removed it from CreditWatch with negative implications and said the outlook was negative. Moody's confirmed AIG's A3 senior unsecured debt rating with a negative outlook.