MBIA's bond insurer unit loses top rating from Fitch

NEW YORK Fri Apr 4, 2008 6:01pm EDT

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NEW YORK (Reuters) - MBIA Inc's (MBI.N) insurance arm on Friday lost its top rating from Fitch Ratings, which also cut the parent company's ratings due to capital adequacy concerns.

MBIA Insurance Corp, the insurance arm of the world's biggest bond insurer, saw its ratings fall to "AA," the third highest, from a top rating of "AAA." Fitch also cut the parent company by three notches to "A," the sixth highest, from "AA."

MBIA shares fell 4.5 percent to trade at $13.65 after the rating cuts.

"The market is already somewhat discounting the value of the franchise," said Evan Rourke, portfolio manager with M.D. Sass in New York.

Tom Spalding, portfolio manager at Nuveen Investments in Chicago, said prices of municipal bonds insured by MBIA are unlikely to cheapen after the Fitch downgrade but price improvement will slow.

"Retail will still buy MBIA insurance, but I don't think institutions are going to be quite as aggressive," Spalding said.

Prices of MBIA-insured munis have been edging higher since Standard & Poor's and Moody's Investors Service affirmed the guarantor's triple-A rating, Spalding said.

Some municipal issuers started using MBIA again because rival Financial Security Assurance, owned by Dexia (DEXI.BR)DEXI.PA, which boasts untainted top ratings from three agencies, has gotten too expensive, Spalding said.

Fitch had been the last of the three major U.S. credit rating agencies to still have the top "AAA" rating for MBIA's insurance arm on review for downgrade.

"Fitch does not believe it will be possible for MBIA to significantly improve its credit profile until the company can more fully reestablish momentum in the financial guaranty market, especially in the core U.S. municipal finance sector," Fitch said in a statement.

Fitch said the company's claims-paying resources are as much as $3.8 billion below target for a "AAA" rating. Fitch also noted it expects the company's losses from collateralized debt obligations to reach as high as $4.9 billion.

"We respectfully disagree with Fitch's conclusions," MBIA Chief Financial Officer C. Edward Chaplin said in a statement on Friday. "MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio, factors which we believe enable MBIA to meet severe economic stress scenarios."

MBIA had asked Fitch to withdraw its ratings on March 7, and on March 24 Fitch said it planned to keep rating the company.

MBIA said in a statement at the time that Fitch's rating process differed from those of other agencies, and that in turbulent times, there was a risk of misinterpretation.

Fitch also said it maintains a negative outlook for MBIA, which means more cuts are possible.

"My reaction is 'big deal,"' said Jim Ryan, an insurance analyst at Morningstar. "MBIA has two of the more important rating agencies standing behind them, and for now, that's good."

(Reporting by Dan Wilchins and Anastasija Johnson; Editing by Leslie Adler)

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