UPDATE 2-S&P cuts FGIC insurance unit's rating to junk status

Fri Mar 28, 2008 7:35pm EDT

(Adds FGIC statement)

NEW YORK, March 28 (Reuters) - Standard & Poor's on Friday cut its ratings on FGIC Corp and its bond insurance arm to junk status, saying the insurer has failed to come up with a plan to remain viable and write new business.

"Our increased concerns over regulatory and managerial issues have led to a downgrade to the speculative-grade level," S&P said in a statement.

S&P cut FGIC Corp by six notches to "B," five steps below investment-grade, from "BBB." It downgraded FGIC's insurance arm, Financial Guaranty Insurance Co, by six notches to "BB," two steps below investment grade, from "A."

The outlook is negative, indicating another rating downgrade is likely over the next two years.

It was the second downgrade to junk status for FGIC Corp this week. Fitch Ratings on Wednesday cut FGIC Corp to "BB" from "A" and cut Financial Guaranty Insurance Co to "BBB," the second-lowest investment grade, from "AA."

"While we are disappointed in S&P's decision, we intend to move forward with plans to address their concerns and restore FGIC's business franchise," a FGIC spokesman said in a statement.

S&P had put FGIC on review for downgrade last week, citing a decision by the bond insurer's principal owner, PMI Group PMI.N, not to put more capital into FGIC.

FGIC has also violated New York state insurance department risk limits, as noted in financial statements the company released on March 26, which may further hamper capital-raising efforts, S&P said on Friday.

In addition to PMI Group, FGIC is owned by private equity firms Blackstone Group (BX.N), Cypress Group and CIVC Partners LP.

FGIC and other bond insurance companies have been hobbled by their expansion into guaranteeing risky collateralized debt obligations (CDOs) and asset backed bonds, markets that have been hammered by rising mortgage losses.

Bond insurers have spent months struggling to defend their ratings, which are key to their ability to attract new business. For details, see [ID:nN19307661].

Unlike market leaders MBIA Inc (MBI.N) and Ambac Financial Group ABK.N, FGIC has not raised extra cash to support its financial position.

"New capital is a critical component," S&P analysts said in a statement. "As time passes, the possibility of a run-off situation for FGIC becomes greater."

A "run-off" situation means FGIC would tend to its existing obligations to policy holders but cease writing new business. (Reporting by Dena Aubin and Neil Shah; Editing by Diane Craft, Gary Hill)

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