NEW YORK (Bloomberg) — The cost to protect against a default by American International Group Inc. declined to the lowest since before the company's government bailout after a $35.5 billion sale of an Asian insurance unit bolstered creditor optimism.

Credit-default swaps on New York-based AIG fell 50 basis points to 400 basis points as of 11.34 a.m. in New York, according to broker Phoenix Partners Group. The contracts, which typically fall as perceived creditworthiness improves, are trading at the lowest since September 3, 2008, after falling 151 basis points the past two days, CMA DataVision prices show.

The sale of the AIA Group Ltd. unit to Prudential Plc is AIG's "biggest step in paying back taxpayers so far", CreditSights Inc. analysts said yesterday in a note to investors. AIG will pay down $9 billion of the $25 billion it owes on a credit line from the Federal Reserve Bank of New York.

"They demonstrated that they have a plan and are taking steps towards making good on that plan," said Clark Troy, a senior analyst based in Chapel Hill, North Carolina, for research firm Aite Group.

AIG executives may get raise: Page 34