REFILE-US CREDIT-No near-term relief for AIG's debt costs

(Refiles to add dropped word in first paragraph)

By Karen Brettell

NEW YORK, Aug 14 (Reuters) - American International Group's
(AIG.N) credit default swaps are trading in line with companies
with junk credit ratings, and as the insurer continues to raise
capital to cover bad mortgage investments its debt spreads are
unlikely to improve near-term.

AIG on Wednesday sold $3.25 billion in new 10-year notes
priced to yield 8.25 percent, a much higher cost than an
existing bond of similar maturity that the insurer issued in
December 2007, which sold with a 5.85 percent coupon, and on
Tuesday was yielding 7.42 percent, according to MarketAxess.

The cost to insure AIG's debt with credit default swaps has
also risen sharply to 305 basis points, or $305,000 per year
for five years to insure $10 million in debt, from around 60
basis points a year ago, according to Markit Intraday.

AIG's credit default swaps are trading in line with a
"Ba1"-rated companies, one step below investment grade,
according to the credit strategy group at Moody's Investors
Service.

This is seven notches lower than AIG's actual rating of
"Aa3," the fourth highest investment grade.

"The company's going to have to start the process of
regaining confidence of investors before its credit spreads are
going to be able to return to historic norms," said Rob Haines,
analyst at independent research firm CreditSights.

"Its trading way wide, even wide for its rating now, and it
definitely doesn't look like investors are willing to give AIG
the premium that it used to command," he said.

AIG last week posted its third consecutive quarterly net
loss of more than $5 billion as it wrote down bad
mortgage-related investments.

The insurer had raised $20 billion to bolster its balance
sheet in June following a loss for the first quarter. AIG has
posted net losses exceeding $18 billion over the past three
quarters.

"The company is not I think in a dire situation where it
needs capital, but when it can opportunistically access the
market I would expect to see it again," Haines added.

AIG "is facing multiple demands on its capital and
liquidity," Gimme Credit analyst Kathleen Shanley said in a
report on Tuesday.

AIG has contributed $2.4 billion to its subsidiaries in the
first half of the year, and said in its second quarter filing
it may need to make more, she said.

RATING RISKS

Goldman Sachs analyst Tom Cholnoky said in a note to
clients that the world's largest insurer may have to raise more
capital to bolster its balance sheet if its credit ratings are
cut again,

If AIG's ratings, already lowered after a record
first-quarter loss, are cut, Cholnoky said it could force the
company to put up an additional $14.5 billion in collateral,
which along with capital hits from second-quarter losses "would
essentially wipe out its recent capital raise." For details,
see [ID:nN11504745]

Standard & Poor's and Moody's Investors Service both
affirmed AIG's ratings at the fourth highest investment grade
after its second quarter loss, but warned that a rating cut is
possible if earnings don't improve.

Both rating agencies have a negative outlook on the
insurer's debt, meaning a downgrade is more likely.

"If earnings do not stabilize by the third quarter, then a
downgrade of one notch is likely," S&P said in a statement.

Moody's said the rating affirmations assume that AIG will
actively address potential liquidity and capital needs at
various operating units, including its domestic life
insurance and retirement services (DLIRS) subsidiaries and AIG
Financial Products Corp.

"Failure to address these concerns in the near term could
lead to rating downgrades at the parent company, DLIRS and/or
other operating units," Moody's said.

(Additional reporting by Lilla Zuill)