(Recasts; adds details)
NEW YORK, Jan 31 (Reuters) - 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 values lower.
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 commercial mortgages.
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 in securities. (Additional reporting by Dena Aubin and Joan Gralla in New York; reporting by Karen Brettell; editing by Gary Crosse)