Jan. 23 (Bloomberg) -- American International Group Inc., the world's biggest insurer by assets, will bail out its Nightingale Finance structured investment vehicle, according to Moody's Investors Service.

AIG Financial Products Corp., a unit of the New York-based insurer, will either buy the SIV's $2.2 billion of senior debt or replace it with loans, Moody's said in an e-mailed statement today. Moody's affirmed its top Aaa ratings for the U.K. Channel Islands-based SIV's senior debt.

AIG follows Citigroup Inc. and HSBC Holdings Plc in financing their SIVs after the collapse of the U.S. subprime mortgage market caused prices of their assets to decline and triggered concern that fire sales would further roil credit markets. SIVs, which use short-term borrowing to invest in higher-yielding securities, have reduced their holdings by more than $100 billion from a peak of $400 billion last year, according to Moody's.

``Any realisation of current or future mark-to-market losses will be avoided given the support of AIG Financial Products, provided that AIG FP remains a going concern,'' the New York-based ratings company said in the statement.

AIG spokesman Chris Winans declined to comment. The company gained $2.40, or 4.6 percent, to $54.81 in New York Stock Exchange composite trading at 4:27 p.m.

NAV Falls

Nightingale was set up in May by Banque AIG, a banking unit owned by the insurer. The SIV has $49 million at risk from subprime loans through $306 million of collateralized debt obligations. CDOs are created by packaging assets including loans and using their income to pay investors. The securities are divided into different portions of varying risk, offering a range of returns.

AIG wrote down $3.39 billion on holdings including mortgage-backed securities in November.

Moody's cut Nightingale's capital notes, the lowest ranking bonds, by seven levels in November to B3, six steps below investment grade, after the company's net asset value fell to 81 percent from 95 percent. Net asset value measures what would be left after a SIV sells its assets and repays senior debt, expressed as a percentage of capital.

AIG had bought almost three quarters of Nightingale's senior debt and was working with creditors to restructure the fund, Chief Executive Officer Martin Sullivan said Dec. 5. It also owns $35.3 million of the company's capital notes. The company doesn't expect a loss on the SIV, Sullivan said at the time.

At least 40 percent of the assets held by Nightingale had the highest credit ratings, according to a Moody's report in May.

Paulson Plan

SIVs tumbled last year as record U.S. home foreclosures led to the collapse of the subprime market, or loans to people with poor or limited credit. Losses drove investors to cut their purchases of commercial paper, or short-term IOUs, backed by assets such as mortgages, raising concerns that SIVs would be forced to sell holdings.

U.S. Treasury Secretary Henry Paulson started talks on setting up an $80 billion bailout fund last year. Citigroup, Bank of America Corp. and JPMorgan Chase & Co. abandoned the so- called SuperSIV after banks began rescuing their own funds, led by London-based HSBC. Citigroup in New York, the largest SIV sponsor, said December it would provide financing for its seven funds, taking on their assets and liabilities.

Bank of Montreal has shrunk its Links Finance Corp. SIV from $23.4 billion in July last year to $15.1 billion in mid- January, the Toronto-based bank said earlier this month.

Five SIVs, including companies set up by IKB Deutsche Industriebank AG in Dusseldorf and London-based Cheyne Capital Management (UK) LLP stopped paying creditors after being shut out of the commercial paper markets.

-- With reporting by Hugh Son in New York. Editor: Andrew Reierson, Michael Shanahan

To contact the reporter on this story: Neil Unmack in London at nunmack@bloomberg.net

Last Updated: January 23, 2008 16:36 EST