Goldman Sachs tells investors not to buy into AIG
(Reuters) - Goldman Sachs recommended investors not to buy into American International Group (AIG.N), citing increased likelihood of a capital raise and/or ratings downgrades at the world's largest insurer, sending its shares down as much as 8 percent in morning trade.
"The central tenet of our 'Don't buy AIG' argument is simple: the intricacies of AIG's business are so complex that management may not even know the extent of the company's ultimate exposures, let alone losses," analyst Thomas Cholnoky said in a note dated August 18.
Cholnoky, who cut his price target on the stock to $23 from $30, cautioned investors that many uncertainties remain, though AIG shares may appear intriguing at current levels.
He said his view is based on the downward spiral which is likely to ensue as more actual cash losses emanate from the financial products segment.
The analyst said he foresees $9 billion to $20 billion in economic losses from the credit default swaps, which could result in even larger cash outlays, resulting in a significant shift in the risk quality of AIG's assets, forcing rating downgrades, and then large-scale capital raises.
"....the cash outlays will be large and the rating agencies will ultimately dictate the level of capital the company may need to cover such losses," Cholnoky said.
Cholnoky rated the stock "neutral" and said with the inevitable large-scale cash call which would accompany losses from financial products, the rating agencies are likely putting off the inevitable.
The issue of losses in AIG's investment portfolio is as potentially troublesome as the losses in financial products, Cholnoky said.
NOTHING TO FEAR BUT MORTGAGES
Earlier this month, AIG reported its third consecutive quarterly loss of more than $5 billion, stemming from further declines in the value of assets linked to subprime mortgages.
"We note that each quarter's disclosures continue to provide incrementally concerning information regarding dangerous exposures," Cholnoky said.
AIG has recorded nearly $25 billion in unrealized market losses from credit default swaps that guaranteed risky mortgage-backed debt.
The firm has already raised in excess of $20 billion in capital, but ended the second quarter with less capital than at the end of the first quarter.
The Goldman analyst said downgrades to AIG's credit or financial strength ratings would trigger collateral calls and accelerated payments, damage to insurance operations, and increased costs for raising capital that would be necessary to bolster the firm's balance sheet strength.
There is very little to suggest that the mortgage market will stabilize in the next six weeks, which indicates that third-quarter earnings could once again be volatile, Cholnoky added.
Shares of AIG were trading down $1.50 at $20.10 in afternoon trade on the New York Stock Exchange. Before Tuesday's change, they have fallen about 62 percent since the start of the year.
(Reporting by Eric Yep in Bangalore; Editing by Jarshad Kakkrakandy)
