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AIG Faces the Grim Rater as Moody's Downgrades Its Units

July 31 was not a happy Friday for American International Group. As the month ended, Moody's Investors Service downgraded two of its key operating units, International Lease Finance Corp. and American General Finance Corp. to just a tad above junk status. Moody's also said that these ratings were "on review" for further downgrade.

Those AIG units, along with virtually everything else at the troubled, once trillion-dollar company, are up for sale. Moody's is one of the two big guns in the rating business (the other is Standard & Poor's). When Moody's speaks, buyers listen.

Considered one of AIG's crown jewels, International Lease Finance, which leases aircraft, was thought to bring big bucks when it sold. In February, China Investment Corp., a $200 billion sovereign wealth fund (a fund that has the backing of its government) was reportedly willing to pay $8 billion for it. Private equity funds such as the Carlyle Group and Kohlberg Kravis Roberts & Co. (KKR) were also said to be in contention.

That didn't happen and now the price will probably be slashed like a designer swimsuit after season's end. Moody's says funding risks at the aircraft leaser are likely to increase and American General, which provides loans, credit and consumer financing, has to pay back $4.5 billion in bank debt by July 2010.
Is Moody's being overly cautious? Perhaps. The good faith and credit of the federal government in the form of TARP dollars is backing AIG, which has already been pronounced "too big to fail" by the U.S. Treasury and the Federal Reserve.

But the rating agencies would rather err on the side of caution. They have already taken enough heat from Congress.

AIG had set a five-year time horizon for the sale of the company and is now hoping that as the stock market rebounds, so will the price of divisions like these two. But beauty is in the eyes of the beholder, and, sad to say, Moody's sees less every time it looks.

The latest downgrade is a knock on the door. The Grim Rater is coming.