American International Group, the world's largest insurer, may have to raise more capital to bolster its balance sheet if its credit ratings are cut again, Goldman Sachs analyst Tom Cholnoky said in a note to clients.
"Although AIG shares have rebounded from their recent lows, we do not believe that the company is out of the woods yet," said Cholnoky, adding that the company could face "significant capital pressures if its credit ratings drop one more notch."
AIG last week reported its third consecutive quarterly loss of more than $5 billion, stemming from further declines in the value of assets linked to subprime mortgages.
AIG shares were down 51 cents, or 2 percent, to $24.36 in morning trade on the New York Stock Exchange, above their 52-week low of $19.73, set in July, but well under the $70.13 they fetched last October.
"We note that the rating agencies appear to have the company on a relatively short leash," said Cholnoky.
If AIG ratings, already lowered after a record first-quarter loss, are cut again, 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."
AIG raised $20 billion of fresh capital to bolster its balance sheet in June, after it posted a first-quarter loss. On Wednesday, AIG reported a second-quarter loss of $5.36 billion as it took its third write-down on credit default swaps, a thorny area that has triggered more than $25 billion in unrealized investment losses for the insurer in recent months.
Cholnoky cut his outlook for AIG adjusted earnings for the next five years. For 2008, he cut his estimate to a loss of 37 cents a share from a profit of $1.67 a share, citing losses on credit default swaps as well as larger-than-expected losses at a mortgage insurance unit.
He lowered his profit estimates for the third and fourth quarters of this year to 66 cents and 79 cents a share, from 95 cents and $1.05, respectively.