Support for AIG Removes Ratings Risk for Structured Finance
Fitch Ratings says the high degree of support extended by the US government to AIG (NYSE: AIG) has removed the risk of adverse rating action on global structured finance transactions where AIG or one of its subsidiaries is a counterparty.
Fitch affirmed AIG’s Issuer Default rating (IDR) at ‘A’ on 10 November 2008, among other rating affirmations, and removed its ratings from Rating Watch Evolving (RWE). This followed the announcement by the US Treasury and the Federal Reserve of a series of actions to provide a high level of explicit and implicit government support to AIG. Furthermore, Fitch believes the US government has significant incentives to ensure AIG is successful in implementing its restructuring plan.
Fitch expects the assumed ‘government support floor’ for AIG to remain in place until AIG fully executes its restructuring plan, thereby limiting immediate AIG counterparty risk in existing structured finance transactions.
Many of the transactions involved were exposed to AIG counterparty risk in the form of interest rate and FX swaps or other derivative contracts and, to a much lesser extent, in the form of rental guarantees of rental payments in certain CMBS transactions. Each contract has specific remedies to mitigate counterparty risk. In most instances collateral was posted by the relevant AIG entity for the benefit of the transaction following AIG’s downgrade in September 2008.
Had the RWE, prior to its removal, resulted in adverse rating action for the insurer, AIG would have breached Fitch’s current criteria for counterparties that support structured finance transactions with the highest investment-grade ratings, which incorporates a minimum rating expectation of ‘A’/'F1′. In that event, Fitch would have expected AIG to take remedial action in the form of either replacement or guarantee of AIG’s commitment or collateralisation of the position, in order for the structured finance ratings to be maintained at current levels.
Fitch is currently reviewing its counterparty criteria in light of recent market turmoil. For more information see “Counterparty Criteria for Global Structured Finance Under Review”, published on October 15 2008.
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