Ambac, MBIA downgrades will impact some markets - S&P

NEW YORK, June 9 (Reuters) - The impact of the downgrades of the bond insurance arms of MBIA Inc (MBI.N) and Ambac Financial Group (ABK.N) will be widespread in the structured finance market and add to pressures on some financial institutions, Standard & Poor's said on Monday.

Any additional write-downs by banks exposed to the world's largest two insurers, however, will likely be manageable in the context of their current ratings, S&P said in a report.

S&P on Thursday stripped MBIA Insurance Corp and Ambac Assurance Corp of their top ratings, citing declining ability to generate new business as well as their diminished financial flexibility. For details, see [ID:nN05590179]

The move came a day after Moody's Investors Service said it is likely to cut its ratings on the two companies.

"In our view, the impact of the downgrades on the structured finance market is wide spread," S&P said. Together, the downgrades affect around $350 billion of structured deals, with Ambac accounting for 60 percent of these deals, and 56 percent of the dollar amount, the rating agency said.

Meanwhile, "we expect the deterioration of the creditworthiness and the resulting downgrades of MBIA and Ambac, with recent downgrades of other monoline bond insurers, to add to the pressures on certain broker-dealers' and banks' financial performance," S&P added.

Many financial companies that are exposed to the bond insurance sector have already written down the value of their insurance, and current ratings on the banks have leeway to absorb incremental additional writedowns, S&P said.

Last week S&P cut its ratings on a number of major U.S. securities firms and said outlooks on the large U.S. financial institutions are now mostly negative. [ID:nL03235694]

The riskiest exposures banks hold to the monolines is through insurance they purchased on debt backed by risky assets such as residential mortgages.

Merrill Lynch MER.N has one of the largest exposures to these types of assets, with $18.8 billion in super senior asset-backed Collateral Debt Obligations (CDOs) as of March 28, S&P said. Merrill wrote down $1.34 billion of this exposure in the fourth quarter of 2007 and the first quarter of 2008.

Similarly, Citigroup (C.N) has purchased $10. 5 billion in protection of similar securities, and wrote down $1.5 billion of this exposure in the first quarter of 2008, S&P said.

However, "for banks and brokers, we currently view the impact of credit erosion in the monoline sector as manageable, despite the high notional amount of securities involved," S&P said.

"Our recent downgrades of Merrill Lynch, Citigroup, UBS, and Morgan Stanley, all with significant monoline hedges, partly reflected their continuing exposure to more risky assets and residual write-downs of securities, including those with monoline protection," the rating agency said.

The impact of the downgrades on the municipal bond market, meanwhile, will likely be limited as competing "AAA" rated insurers will easily absorb Ambac and MBIA's business, while a higher percentage of municipal debt has also been successfully sold without an insurance wrap.

Money market funds holding municipal debt are also unlikely to need to be forced sellers of securities insured by the companies, as their current "AA" rating is adequate for the credit quality guidelines.

(Reporting by Karen Brettell;)