AIG may take sizable markdowns on Lehman impact: UBS

publication date: Sep 15, 2008

American International Group will likely incur sizable markdowns, as the liquidation of Lehman Brothers is expected to put substantial pressure on structured finance securities and credit default swaps (CDS), according to analysts at UBS. AIG may incur over US$10 billion in super-senior CDS losses, and US$5 billion in realised investment portfolio losses in the third quarter, the analysts said. AIG, which has been hit by US$18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, was hit on Friday by Standard & Poor's putting the company's credit ratings on negative watch, indicating a possible downgrade.

Even an equity raise is unlikely to avert a ratings downgrade, UBS analysts Andrew Kligerman, Julie Oh and Brian Meredith said in a note dated Sept 14. The New York Times earlier reported that AIG, until recently the world's biggest insurer by market capitalization, had made an approach to the Federal Reserve seeking US$40 billion in short-term financing.

The analysts, however, said that though the stock could trade down given these events, they still seem to have longer-term upside value. They maintained a 'buy' rating on the stock. 'Even with credit ratings downgrade, we think AIG has sufficient (albeit, far from robust) cash/collateral sources to meet its near-term liquidity/capital needs without raising equity,' the analysts wrote in a note dated Sept 14.