MBIA's bond insurer unit loses top rating from Fitch

By Walden Siew and Dan Wilchins

NEW YORK (Reuters) - MBIA Inc's (MBI.N) insurance arm on Friday lost its top rating from Fitch, which said the biggest bond insurer in the world fell as much as $3.8 billion short of what it needed to keep the highest rating.

Earlier this year even the possibility of downgrades of major bond insurers roiled financial markets. But Fitch's action comes after several insurers have already lost their triple-A ratings, and was not a surprise to investors who are already discounting the value of MBIA insurance.

But still, the news is not positive for MBIA, which guarantees about $680 billion of debt and needs to appear robust and stable to win new business.

MBIA's shares fell 68 cents, or 4.8 percent, to close at

$13.61.

MBIA Insurance Corp still carries the top ratings from Moody's Investors Service and Standard & Poor's. The bond insurer believes these agencies better understand the risks in its portfolio, and asked Fitch last month to stop rating it.

MBIA raised $2.6 billion of capital earlier this year, and has made other moves to boost its ability to pay claims, such as deciding in February not to guarantee new asset-backed securities for six months.

Standard & Poor's and Moody's Investors Service affirmed MBIA Insurance Corp's triple-A ratings in February, and Chief Executive Jay Brown, told Reuters then that he expected those ratings to stand for 12 to 18 months.

Fitch said MBIA would needs another $3.4 billion to $3.8 billion of capital to maintain a "AAA" credit rating.

The company faces a host of potential head winds, Fitch said. MBIA will have trouble improving its credit quality until it can win more bond insurance business, particularly in the municipal bond sector. MBIA's franchise has suffered less than other bond insurers, Fitch noted.

Fitch estimates that MBIA's repackaged mortgage bonds, known as its structured finance collateralized debt obligation portfolio, will suffer losses of $3.1 billion to $4.9 billion.

Additionally, MBIA's investment management business appears to be taking on more risk than it ought to, Fitch said.

MBIA Insurance Corp saw its ratings fall to "AA," the third highest, from "AAA." Fitch also cut the parent company by three notches to "A," the sixth highest, from "AA." Fitch said MBIA's outlook for MBIA is negative, which means more cuts are possible over the long term.

Tom Spalding, portfolio manager at Nuveen Investments in Chicago, said the 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.