(Recasts; adds details)
NEW YORK Jan 31 Standard & Poor's on Thursday
cut its "AAA" ratings on FGIC Corp's bond insurance arm, and
placed its top ratings on MBIA Inc's (MBI.N) bond insurance
unit on review for a possible downgrade.
The credit ratings agency also said it may cut the "AAA"
rating of XL Capital Assurance Inc, the bond insurance arm of
Security Capital Assurance SCA.N.
Ambac Financial Group's ABK.N bond insurance arm remains
on review and may lose its top rating, S&P said.
The ratings action was seen as a blow to bond insurers that
are scrambling to raise capital required to hold their top
ratings. The companies are at risk of losing the ratings
because of expected losses from risky residential mortgage
securities in their insurance portfolios.
The New York State Insurance Department has been working
with banks to shore up monoline insurers' capital, though
analysts including CreditSights have said any rescue plan is
likely to come too late to save their top ratings.
S&P cut Financial Guaranty Insurance Co's "AAA" insurer
financial strength rating by two notches to "AA." It also cut
parent company FGIC Corp's long-term rating by three notches to
"A," the sixth-highest investment grade, from "AA."
FGIC, the fourth-largest bond insurer, is owned by a group
that included mortgage insurer PMI Group Inc PMI.N and
private equity firms Blackstone Group (BX.N), Cypress Group and
CIVC Partners LP.
S&P said it cut FGIC because it views the company's capital
raising plan as insufficient to address expected losses by the
insurer. Also, "the company's ability to access additional
capital resources is uncertain," the agency said.
The insurer's "AAA" ratings would be restored if FGIC is
successful in raising the required capital, S&P added.
The review on MBIA contradicts reassurances made by the
embattled company's Chief Financial Officer C. Edward Chaplin
made earlier about its "AAA" rating.
Chaplin said on a conference call that S&P had indicated
the insurer's capital plan was sufficient for keeping the
rating. He also said he expected an "affirmative" outcome from
Moody's Investors Service's review of its "AAA" rating.
"Although MBIA has succeeded in accessing $1.5 billion of
additional capital, the magnitude of projected losses
underscores our view that time is of the essence in the
completion of capital-raising efforts," S&P said.
Difficulties at MBIA, the largest bond insurer, and the
industry could have a huge impact on credit markets. As
downgrades roll in, investors that can only own top-rated
instruments will have to sell their securities, pushing bond
Those price declines would deal another blow to investors
already reeling from the subprime mortgage crisis.
"I hope they (regulators, credit agencies) realize the
depth of how much," said Glenn Williams, managing partner at
Philadelphia-based brokerage Grant Williams.
"This really runs through just about everything -- mutual
funds, corporations, closed end funds, tender option bonds --
all the way down to the individual investors, not to mention
you could hypothetically freeze out issuers from being able to
issue muni debt," he added.
Municipal bonds have one of the lowest default rates in the
world at less than 1 percent, but many issuers buy bond
insurance since it makes it marketing the bonds easier.
States, counties, cities and towns have sold about $2.5
trillion of debt to pay for new schools and roads, for example,
and about half of that debt is backed by bond insurance.
As of the end of September, MBIA guaranteed $673 billion in
debt, $240 billion of which was on structured deals known as
collateralized debt obligations (CDOs).
Residential mortgage-backed debt comprised 22.3 percent of
this portfolio, with an additional 17.9 percent backed by
As the fourth-largest bond insurer, FGIC had about $314.8
billion of outstanding bonds insured as of the end of
September, most of which was municipal debt. The total also
included about $31 billion of mortgage-backed securities and
$28 billion of collateralized debt obligations.
Through the end of September, XL had insured $154 billion
(Additional reporting by Dena Aubin and Joan Gralla in New
York; reporting by Karen Brettell; editing by Gary Crosse)