S&P revises outlook on AIG debt to negative

NEW YORK (Reuters) - Standard & Poor's on Friday revised the outlook on its ratings of American International Group and its guaranteed subsidiaries to "negative" from "developing," citing risks related to the insurer's plan to sell assets.

The agency has an 'A-' rating on AIG (AIG.N), four notches above speculative, or "junk" status.

AIG's insurance operating units remain on review with a "developing" outlook, said S&P.

AIG's rating relies on the support the company receives from the $85 billion loan facility provided by the Federal Reserve Bank of New York as part of a recent bailout of the company.

The loan provides the liquidity to meet short-term financing needs while AIG prepares the sale of various businesses.

"However, the $61 billion draw to date on the facility is much larger than we had previously anticipated, causing the scope of the planned business sales to exceed our expectations," S&P analyst Rodney Clark said in a statement.

The revised outlook reflects the agency's concerns that AIG may have trouble executing on the plan, given the current disruption in credit markets.

At the same time, the smaller and less-diversified company that will emerge if sales are successful faces higher debt-service costs, said Clark.

The cost of insuring AIG debt against possible default tightened slightly Friday, although credit default swaps continued to trade at distressed levels.

CDS were trading at 27.5 percent upfront, or $2.75 million annually to insure $10 million for five years, plus annual payments of $500,000, according to Markit Intraday.

CDS trade upfront when default fears rise and sellers of protection want to be paid more at the outset of the contract.

(Reporting by Ciara Linnane; Editing by Dan Grebler)