Credit Suisse is reducing its estimates and price target on American International Group (AIG), arguing that the firm is sitting on a huge loss in its credit default swap portfolio. CS has nearly tripled its loss estimate on AIG’s CDS book, from $2.6 billion to $6.5 billion:
AIGs credit default swap (CDS) portfolio inherently makes it one of the most exposed names to recent credit deterioration. Based on current marks, we estimate AIG-FP is sitting on a $6.5 billion dollar loss vs. our previous estimate of a loss of $2.6 billion. Accordingly, we are lowering our 3Q’08 EPS estimate to ($0.86) from a gain of 13 cents. Additionally, based on our mark-to-market analysis of AIG’s investment portfolio, we would expect AIG’s book value to decline by 6% QTD.
Credit Suisse is also concerned that AIG’s huge losses could result in one of the ratings agencies downgrading their debt. This would require AIG to put up another $13.3 billion in collateral:
With at least one major rating agency explicitly saying “if earnings do not stabilise by the third quarter,” another downgrade is likely, the risks of a near term rating action have clearly risen, in our view. In the event of a 1 notch ratings downgrade from both Moody’s and S&P, AIG would be required to post up to $13.3 billion of additional collateral.
Credit Suisse maintains its Neutral rating and cuts its price target from $30 to $22.
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