AIG Seeking Capital, May Sell Units to Help Ratings (Update2)

AIG Seeking Capital, May Sell Units to Help Ratings (Update2)
By Hugh Son

Sept. 15 (Bloomberg) -- American International Group Inc., the largest U.S. insurer by assets, was working on plans late yesterday to raise capital and sell units to forestall credit downgrades from hobbling the company.
AIG asked the Federal Reserve for a $40 billion bridge loan after rejecting an offer from J.C. Flowers & Co. that would have given the buyout firm an option to acquire the whole company, the New York Times said, citing an unidentified person. AIG may get access to the Fed's borrowing window in an ``extreme liquidity scare,'' Citigroup Inc. analyst Joshua Shanker said Sept. 12.
Chief Executive Officer Robert Willumstad is under pressure to raise capital after three quarterly losses totaling $18.5 billion. AIG fell 27 percent in German trading today on investor concern the New York-based insurer can't raise enough cash to withstand further writedowns from credit-default swaps, contracts AIG sold to protect fixed-income investors.
``The driving force in this is to raise capital to give them more of a cushion to stave off a downgrade,'' said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance.
Standard & Poor's said Sept. 12 it may downgrade AIG's credit ratings because the share declines may crimp the insurer's access to capital.
AIG slumped to $8.84 by 11:12 a.m. in Germany, after closing at $12.14 on the New York Stock Exchange on Sept. 12. The stock has fallen 79 percent this year in New York.
`The Public Good'
A ratings cut may have ``a material adverse effect on AIG's liquidity'' and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments, AIG said.
``We would not be surprised to see the Federal Reserve open its borrowing window to AIG,'' Shanker said in a note to investors Sept. 12. ``The Fed could argue the action is for the public good as it protects the security of many housing loans.'' AIG has units that originate, guarantee and invest in mortgages.
AIG spokesman Nicholas Ashooh and the Fed's Michelle Smith didn't return phone calls seeking comment.
The Federal Reserve yesterday widened the collateral it accepts for loans to Wall Street bond dealers as the financial industry braced for a Lehman Brothers Holdings Inc. bankruptcy filing. The 158-year-old securities firm filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today.
``The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,'' Fed Chairman Ben S. Bernanke said in a statement released in Washington yesterday.
J.C. Flowers
The insurer was in discussions with buyout firms including KKR & Co. and J.C. Flowers to raise $20 billion in capital, said people familiar with the situation. The firms met with AIG executives in New York, said one of the people, who declined to be named because the talks were private. AIG is said to be working with advisers JPMorgan Chase & Co., Citigroup Inc. and Blackstone Group LP.
J.C. Flowers had offered $8 billion for a stake in the insurer that would have given the firm an option to buy the rest of AIG, the Times said.
The insurer may also seek $20 billion through asset sales, said a person familiar with AIG's planning.
American General Finance, AIG's consumer lender, could fetch more than $6 billion if the unit sold for twice its book value. AIG Investments could sell for more than $3 billion if it sold for 2.5 percent of clients' assets under management. The company's stake in reinsurer Transatlantic Holdings Inc. is worth about $2.2 billion, based on the Sept. 12 share price.
Dinallo, Paterson
Bank of America Corp. analyst Alain Karaoglan said Willumstad, 63, should reconsider the decision to keep its aircraft-leasing unit, International Lease Finance Corp. which could sell for $7 billion to $14 billion.
The insurer raised $20.3 billion in May by selling debt and equity, diluting the holdings of long-time investors. It's ``very hard to predict'' if AIG will need more capital, Willumstad said Aug. 7.
New York Governor David Paterson and Insurance Superintendent Eric Dinallo have been ``very, very closely involved,'' in AIG's planning, said David Neustadt, a spokesman for Dinallo, in an interview yesterday. ``We've spent the last two days at AIG headquarters.''
AIG's former CEO and Chairman Maurice ``Hank'' Greenberg, who controls the largest stake in the insurer, wasn't involved in the company's planning this weekend and has ``repeatedly offered'' to assist the firm, said spokesman Glen Rochkind.
Greenberg, 83, saw the holdings decline by $3.1 billion last week. He controls 11 percent of AIG shares through two investment firms and personal holdings.
To contact the reporter on this story: Hugh Son in New York at hson