By Dan Shaw, Evensville Courier & Press
American General Financial Services is greatly reducing its retail financing, ending more than 20,000 relationships with retail merchants.
"We are scaling back our retail financing program at AGFS, given current economic conditions and resulting liquidity constraints," said Mark Herr, a spokesman for American International Group, the insurance giant and parent company of American General Finance.
The company will stop providing the service to some businesses by June 11, according to a letter obtained by the Courier & Press from a local store.
Here's how retail financing often works: Rather than make customers pay outright, stores will let their merchandise be bought in installments. Companies like American General Finance then step in and buy the finance contracts, allowing them to collect the installment payments.
According to a recent regulatory filing, American General Finance plans to reduce the number of retail merchants it does business with from 21,500 to 300 during the second quarter of this year. The merchants exist throughout United States, Puerto Rico and the U.S. Virgin Islands.
Those affected will now have to find another provider of the service, rely on other financing programs or go without financing for a while.
In recent times, American General Finance has suffered from rising defaults on its loans, many of them made to subprime borrowers. That, in turn, has damaged the company's own creditworthiness.
In the past, the company would raise money through issuing debt, issuing commercial paper, borrowing from banks and other means.
Many of those sources have dried up, partly because lenders have adopted stricter standards during the recession. Rating agencies have also downgraded their measures of American General Finance's ability to repay debt.
On Friday, Fitch Ratings lowered its rankings of the company's long-term and senior debt from "BBB" to "BB", and its short-term debt and commercial paper from "B" to "F1."
Those difficulties coupled with concerns about bad loans have led American General Finance to report a string of losses in recent quarters. For the first three months of 2009, the company booked an operating loss of $203 million, mainly because it set aside $186 million to protect itself against possible defaults in the future.
To deal with those troubles, American General Finance has lowered its rates of making many kinds of loans. Once a large player in the subprime mortgage business, the company has brought that sort of lending to a simmer in recent months. It is also backing away from real-estate lending.
In a conference call last week about AIG's first-quarter earnings, company officials talked about plans to "reposition" American General Finance. Paula Rosput Reynolds, AIG vice chairman and chief restructuring officer, then said, "A key effort right now is to reduce (loan) origination and reduce costs. And they have continued to try to do work on both fronts."
In the meantime, AIG, which has received about $187 billion in assistance from the government, expects to help American General Finance pay off any debt which may come due in the next year. According to regulatory filings, American General Finance carried $22.5 billion in debt by March 31, which was down from $23.6 billion a year earlier.
"AIG intends to provide such support through May 15, 2010," the company stated.