Actually, 48 hours – 72 hours, in the event of a credit rating downgrade.
So reports the New York Times, citing an individual close to the firm. The reason for the dramatic warning: ratings downgrades would spell huge collateral calls from counterparties on AIG’s CDS. The relevant detail is in AIG’s 10Q from June 30:
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.
If both key rating agencies downgrade:
It is estimated that, as of the close of business on July 31, 2008, based on AIGFP’s outstanding municipal GIAs and financial derivative transactions at that date, a downgrade of AIG’s long-term senior debt ratings to ‘A1’ by Moody’s Investors Service (Moody’s) and ‘A+’ by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P), would permit counterparties to make additional calls for up to approximately $13.3 billion of collateral, while a downgrade to ‘A2’ by Moody’s and ‘A’ by S&P would permit counterparties to call for approximately $1.2 billion of additional collateral.
If only one cuts:
If either of Moody’s or S&P downgraded AIG’s ratings to ‘A1’ or ‘A+’, respectively, the estimated collateral call would be for up to approximately $10.5 billion, while a downgrade to ‘A2’ or ‘A’, respectively, by either of the two rating agencies would permit counterparties to call for up to approximately $1.1 billion of additional collateral.
Furthermore, a downgrade of AIG’s long-term senior debt ratings to ‘A1’ by Moody’s or to the same levels by both rating agencies would permit either AIG or the counterparties to elect early termination of contracts resulting in payments of up to approximately $4.6 billion, while a downgrade to ‘A2’ by Moody’s and ‘A’ by S&P would permit either AIG or the counterparties to elect early termination of additional contracts resulting in additional payments of up to approximately $800 million. AIGFP believes that it is unlikely that certain of these counterparties would exercise their rights to elect termination of their contracts given the substantial economic benefit that such counterparties would forfeit upon termination.
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, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade. Additional obligations to post collateral or the costs of assignment, repayment or alternative credit support would increase the demands on AIG’s liquidity. Further downgrades could result in requirements for substantial additional collateral, which could have a material adverse effect on AIG’s liquidity. For a further discussion of AIG’s credit ratings and the potential effect of posting collateral on AIG’s liquidity, see – Capital Resources and Liquidity – Credit Ratings and – Liquidity herein.
Goldman analysts put it last month, and as we paraphrased at the time: “AIG is going the way of the monolines… but on a much larger scale.”