WRAPUP 1-NY bond insurer bailout plan too late-CreditSights

NEW YORK Jan 29 (Reuters) - The proposal by New York state's insurance regulator to bail out monoline bond insurers is coming "too late" to avert ratings downgrades, and a broader regulatory effort will likely be required, CreditSights said on Tuesday.

New York State Insurance Superintendent Eric Dinallo is working with banks to figure out how to rescue the industry, people briefed in the matter said last week, but there are so many competing interests involved that any solution will not likely come in time, CreditSights said.

If bond insurers lose their top ratings and funds are forced to sell off billions of dollars of insured debt, an outcome regulators are hoping to prevent. U.S. bond insurers guarantee more than $2.4 trillion of debt.

The outlook for bond insurers has deteriorated in recent months, but some investors are still hopeful. Share prices of the two largest such insurers, Ambac Financial Group Inc ABK.N and MBIA Inc (MBI.N), surged on Thursday amid talk that ratings for Ambac's main insurance unit were close to being affirmed.

But analysts at research firm CreditSights write that multi-step downgrades are a real possibility now, because rating agencies are setting high capital requirements high and the public markets for raising capital seem closed to the bond insurers now.

"Essentially the markets and the rating agencies have set into motion a self-fulfilling prophecy which could now lead to further downgrades," CreditSights analysts wrote.

People briefed on Dinallo's talks with banks last week said the regulator was pressing banks to provide up to $15 billion of emergency backup credit. A person briefed on the matter said on Monday that the regulator and banks are more likely to try to selectively rescue bond insurers.

CreditSights analysts wrote, "In the off chance that any deal could likely be solidified, the rating agencies are likely to have already taken action."

Expected losses are mounting for bond insurers after they guaranteed billions of dollars of securities linked to subprime mortgages. Ambac said earlier this month that write-downs of guarantees had eaten away at two-thirds of the company's net worth in the fourth quarter.

Adding to that concern, $446 million of bonds insured by Ambac and linked to a Las Vegas monorail project could default in as soon as two years, Moody's Investors Service said on Thursday.

The top municipal issuer of insured debt last year was California. For details, see: [ID:nN29595395]

RUMORS OF AFFIRMATION

Potential insurance payouts could cost several bond insurers their top credit ratings, which are crucial for winning new business. Downgrades may also force investors to sell billions of dollars of insured bonds, because many can only invest in securities with top ratings.

Such forced sales would lift borrowing costs for city governments and consumers. For more information on how bond insurers work, please double-click: [ID:nN25352128]

Many insurers would likely just stop writing new guarantees, but some would likely need a broader regulatory fix to boost their capital levels, CreditSights analysts wrote. "The viability of the municipal debt capital markets is clearly in the public interest," the analysts wrote.

Fitch cut the top ratings for Ambac's main unit, Ambac Assurance Corp, on Jan. 18.

The two other major credit rating agencies, Moody's Investors Service and Standard & Poor's, have said they might cut Ambac Assurance's top ratings.

CreditSights believes that at current levels, Ambac is probably the most attractive of the financial guarantors as an acquisition target. Ambac, the second largest bond insurer after MBIA, guarantees about $550 billion of debt.

Britain's Evening Standard reported last week that billionaire Wilbur Ross was in advanced talks to buy the company.

Shares of Ambac rose 16.2 percent on Tuesday to $12.93 on the New York Stock Exchange. MBIA shares rose 7.6 percent to close at $15.98.