AIG 2008 Annual Report Download - page 29

• A.M. Best affirmed the Insurer Financial Strength Ratings and Issuer Credit Ratings of the insurance
subsidiaries of AIG, Inc. In addition A.M. Best affirmed the Issuer Credit Rating of AIG, Inc. These ratings
were removed from Under Review with Negative Implications and assigned a Negative Outlook.
Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and
availability to that company of unsecured financing and its eligibility for certain government sponsored funding
programs such as the CPFF, as discussed below. In the event of a further downgrade of AIG’s long-term senior debt
ratings, AIGFP would be required to post additional collateral and AIG or certain of AIGFP’s counterparties would
be permitted to elect early termination of contracts.
It is estimated that as of the close of business on February 18, 2009, based on AIGFP’s outstanding municipal
GIAs, secured funding arrangements and financial derivative transactions (including AIGFP’s super senior credit
default swap portfolio) at that date, a one-notch downgrade of AIG’s long-term senior debt ratings to Baa1 by
Moody’s and BBB+ by S&P would permit counterparties to make additional collateral calls and permit either
AIGFP or the counterparties to elect early termination of contracts, resulting in up to approximately $8 billion of
corresponding collateral postings and termination payments, a two-notch downgrade to Baa2 by Moody’s and BBB
by S&P would result in approximately $2 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 approximately $1 billion in
additional collateral and termination payments.
The actual amount of collateral that AIGFP would be required to post to counterparties in the event of such
downgrades, or the aggregate amount of payments that AIG could be required to make, would depend on market
conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the
downgrade. If AIG is unable to secure sufficient additional funding through the Fed Facility or otherwise, AIG
could become insolvent.
ILFC is a party to two Export Credit Agency (ECA) facilities that require ILFC to segregate security deposits
and maintenance reserves related to aircraft financed under these facilities into separate accounts in the event of a
downgrade in ILFC’s credit ratings. In October 2008, Moody’s downgraded ILFC’s debt ratings, and ILFC was
subsequently notified by the trustees under its ECA facilities that it would be required to segregate security deposits
and maintenance reserves totaling approximately $260 million in separate accounts. Further downgrades would
impose additional restrictions under these facilities, including the requirement to segregate rental payments and
would require prior consent to withdraw funds from the segregated account.
For a further discussion of AIG’s liquidity, see Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Capital Resources and Liquidity — Liquidity.
A downgrade in the short-term credit ratings of the commercial paper programs of certain AIG affiliates could
make these issuers ineligible for participation in the CPFF. AIG Funding and affiliates Curzon Funding LLC and
Nightingale Finance LLC currently obtain financing through participation in the CPFF. As of February 18, 2009,
AIG Funding, Curzon Funding LLC and Nightingale Finance LLC had $6.1 billion, $6.8 billion and $1.1 billion,
respectively, outstanding under the CPFF. However, in the event of a downgrade of the short-term credit ratings
applicable to the commercial paper programs of these issuers, they may no longer qualify for participation in the
CPFF and would likely have significant difficulty obtaining access to alternative sources of liquidity. AIG’s
subsidiary, ILFC, participated in the CPFF at December 31, 2008, but on January 21, 2009, S&P downgraded
ILFC’s short-term debt rating and, as a result, ILFC lost access to the CPFF. The CPFF purchases only U.S. dollar-
denominated commercial paper (including asset-backed commercial paper) that is rated at least A-1/P-1/F1 by a
major nationally recognized statistical rating organization (NRSRO) or, if rated by multiple major NRSROs, is rated
at least A-1/P-1/F1 by two or more major NRSROs. Accordingly, these AIG entities will lose access to the CPFF if:
• AIG Funding’s short-term rating is downgraded by any two of S&P, Moody’s or Fitch;
• Curzon Funding LLC’s short-term rating is downgraded by either S&P or Moody’s; or
• Nightingale Finance LLC’s short-term rating is downgraded by either S&P or Moody’s.
Adverse rating actions could result in further reductions in credit limits extended to AIG and in a decline in the
number of counterparties willing to transact with AIG or its affiliates. To appropriately manage risk, AIG needs
trading counterparties willing to extend sufficient credit limits to purchase and sell securities, commodities and
AIG 2008 Form 10-K 23
American International Group, Inc., and Subsidiaries