(Adds Ross comments, updates stocks)
By Walden Siew
NEW YORK Dec 13 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
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,"
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
Ambac shares fell 4.1 percent, while shares of MBIA Inc
(MBI.N), the world's biggest bond insurer, fell 7.6 percent on
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
"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
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
MBIA has a "flawed business model," Einhorn said, and he
has been betting on MBIA's stock to fall for the past five
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