American International Group's credit spreads are likely to widen further after the world's largest insurer suffered a record loss in the first quarter and warned that the market for mortgage assets has not bottomed out yet.
AIG's $7.8 billion first quarter loss on write-downs of assets linked to faltering subprime mortgages could be a precursor to more bad news next week when bond and mortgage insurers report results. More losses by troubled bond insurer MBIA Inc and mortgage insurers PMI Group Inc and Radian Group, which report on Monday, could pressure credit spreads after a month-and-half rally.
This would hit AIG, which over the last two quarters recorded about $20 billion of unrealised losses in a credit default swap portfolio linked to faltering US residential mortgage-backed securities. "Given the extent of AIG's exposures to the subprime market and the flagging performance of its mortgage business and risk of further mark-to-market losses in its unit's super senior credit portfolio, we expect that AIG spreads could widen by 20-30 basis points," if other insurers report subpar results, Barclays Capital analysts wrote in a report.
Investors should short AIG credit by buying its credit default swaps at current levels, Barclays Capital analysts said. The cost to insure AIG's debt against default rose to 119 basis points on Friday, or $119,000 to insure $10 million of debt from around 99 basis points prior to the earnings announcement, according to Markit Intraday.
The credit default swaps traded as high as 256 basis points at the high of credit crisis on March 17 and narrowed to as low as 90 basis points on May 1. The cost to insure AIG's debt is also rising because rating agencies said they may cut its ratings further if the insurer's plan to raise about $12.5 billion to shore up its balance sheet is not successful. Standard & Poor's and Fitch Ratings already cut its rating by one notch to "AA-minus," the fourth highest investment grade rating.
Comments
Comments are closed.