American International Group Inc. said in August that the kinds of rating cuts that have taken place this week could permit counterparties to ask for more than $14 billion in additional collateral and also could lead to costly contract terminations.
The collateral call issue concerns AIG Financial Products Corp., a unit of AIG, New York, that has been selling credit protection arrangements based on credit default swaps.
Moody’s Investors Service, New York, now has cut its senior unsecured debt rating on AIG to A2, from Aa3, and Standard & Poor’s Ratings Services, New York, has cut its long-term counterparty rating on AIG to A minus from AA minus.
Here is what AIG wrote about ratings in August, in a 10-Q report filed with the U.S. Securities and Exchange Commission:
A significant portion of AIGFP’s guaranteed investment agreements (GIAs) and financial derivative transactions include provisions that require AIGFP, upon a downgrade of AIG’s long-term debt ratings, to post collateral or, with the consent of the counterparties, assign or repay its positions or arrange a substitute guarantee of its obligations by an obligor with higher debt ratings.