5 Min Read
(Adds Ross comments, updates stocks)
By Walden Siew
NEW YORK, Dec 13 (Reuters) - Crucial top ratings of bond insurers including Security Capital Assurance SCA.N and Ambac Financial Group ABK.N are under siege and the stakes go beyond just keeping their investment-grade status.
Analysts say the insurers' exposure to risky subprime mortgage losses may reaccelerate the U.S. credit downturn that has gripped global markets since July.
The growing fears center on the insurers' guarantees on complex debt tied to deteriorating mortgages. Ratings downgrades could spark a ripple effect of further rating cuts of the securities they insure, impacting everything from municipal bonds to asset-backed securities sold by banks.
Bond insurers' guarantees of $2.5 trillion of bonds and structured financing make possible such things as hospital and school building for local governments. In addition, insured bonds carry higher credit ratings, which lowers borrowing costs for issuers.
To alleviate concerns, Ambac Financial, the world's second largest bond insurer, reached an agreement on Thursday to shift some risk exposure to Assured Guaranty Ltd (AGO.N), which will reinsure $29 billion worth of Ambac's financial guaranty contracts. Ambac said the transaction increases its claims-paying resources. For details, see [ID:nWNAS4523]
"It is clear that these entities now have every incentive to keep their rating," Greg Peters, head of credit strategy at Morgan Stanley, said on Thursday. "Today they have begrudgingly moved from the denial stage into the recognition and partial acceptance phase. My sense is that this is just the proverbial tip of the iceberg."
Credit ratings agencies last month warned that capital adequacy levels of some of the bond insurers may be below requirements to keep their top "AAA" ratings.
"Two weeks ago, they were in denial and were outwardly complaining that the markets didn't understand their business," Peters added.
Fitch Ratings on Wednesday said it may cut top ratings of Security Capital Assurance and its units by two notches to "AA," saying SCA's capital adequacy falls below guidelines for an "AAA" rating by more than $2 billion. Shares of SCA, which plummeted 22 percent on Wednesday, shed another 22.4 percent on Thursday.
Ambac shares fell 4.1 percent, while shares of MBIA Inc (MBI.N), the world's biggest bond insurer, fell 7.6 percent on Thursday.
Declines have recently caught the attention of billionaire investor Wilbur Ross, who has been snapping up mortgage assets at fire-sale prices. Ross told CNBC on Thursday that hard-hit monoline insurers could be another attractive area for investment.
"We're looking at the monoline insurers. They all need capital," said Ross, who runs New York investment firm WL Ross & Co. "It seems that if you can find one make it through without losing its triple-A rating, that could be a very good investment."
MBIA, which on Monday reached a deal for a $1 billion capital infusion from buyout firm Warburg Pincus LLL [WPL.UL] amid concern about its ability to pay claims on faltering mortgage-backed bonds, said on Thursday it will not hold a planned conference call on Friday, pending the completion of reviews by ratings agencies.
Some investors now even question the validity of the bond insurer business model.
"At this point the only people who seem to think MBIA is "triple-A" is its management and the credit rating agencies, which haven't gotten around to changing them," hedge fund manager David Einhorn, president of Greenlight Capital, told the Reuters Investment 2008 Outlook Summit in New York this week.
MBIA has a "flawed business model," Einhorn said, and he has been betting on MBIA's stock to fall for the past five years.
A Fitch Ratings spokesman said its review of the bond insurer industry should be finished by early next week.
Moody's Investors Service earlier this week said the capital infusion from Warburg Pincus meaningfully enhances the financial flexibility of the bond insurer and supports the "AAA" rating of its insurance arm.
The capital injection "provides an important signal of market support for the franchise," Moody's said in a statement.