Credit rating firms seen holding back on bond insurers

NEW YORK (Reuters) - Wall Street's top credit-rating agencies may be delaying a downgrade of the bond insurance companies at the heart of the credit crisis due to fears that ratings cuts could trigger another crisis in global markets.

That is the view of many investors and analysts in U.S. capital markets, who say rating firms Moody's Investors Service and Standard & Poor's have already given MBIA Inc (MBI.N) and Ambac Financial Group (ABK.N), the two largest bond insurers, too much time to shore up their troubled balance sheets.

"What are they waiting for?" said Edward Grebeck, chief executive of Tempus Advisors, a debt strategy firm in Stamford, Connecticut. "It's not like the bond insurer crisis started two weeks ago or in December."

Moody's and Standard & Poor's warned several bond insurers in December to raise more cash or risk eventually losing their top ratings, which are crucial to their business of guaranteeing roughly $2.5 trillion of securities tied to municipalities and consumer debt.

If the bond insurers lose their top ratings, Wall Street firms that bought this insurance are likely to unleash another wave of potential losses on mortgage investments, while other investors may be forced to sell insured debt, setting off a chain reaction that could hurt the slowing U.S. economy.

"Some of the monolines (insurers) should have been downgraded a long time ago." said Arturo Cifuentes, managing director at fixed-income broker-dealer R.W. Pressprich in New York and a former Moody's analyst.

"If any other company with a 'AAA' rating had been in that situation, it would have been downgraded on the spot - two, three days and that's it," he said.

Spokespersons for Moody's and Fitch Ratings were not available for comment.

But Moody's analysts have said they try to conclude reviews within 30 to 90 days, and S&P has said it does so within 90 days. Moody's put the insurance units of MBIA and Ambac on review for a downgrade in mid-January.

Fitch Ratings, which has a much smaller market share than Moody's and S&P, cut its top "AAA" ratings on FGIC Corp's bond insurance arm on Wednesday.

Mimi Barker, a S&P spokesperson, said the firm "continues to monitor the performance of the bond insurers, and we will take rating actions when we believe such actions are warranted."

But with defaults by subprime mortgage borrowers rising and mortgage bonds sinking in value, bond insurers may be on the hook for billions of dollars of payouts they can't afford.

Last week, New York State Insurance Superintendent Eric Dinallo pressed major Wall Street banks to contribute billions of dollars to some sort of bailout effort, but some analysts are already worried the effort may be too late.

TOO BIG TO DOWNGRADE?

A series of bond insurer downgrades would further roil U.S. credit markets in the near term, analysts said, crimping issuance of new securities tied to consumer debt. That, in turn, would hurt the bottom lines of the bond-rating firms.

So-called structured finance, which includes mortgage bonds, accounted for $886.7 million of revenue in 2006 for Moody's Corp, parent of Moody's Investors Service, a value that has risen at a compound annual growth rate of more than 20 percent since 2002.

"Rating agencies have a vested interest in the flow of activity in the fixed income markets," said Adam Compton, co-head of global financials research at RCM Global Investors in San Francisco, which has some $150 billion of assets under management.

"They might be in conflict here - if there are no bonds issued, there is no need for ratings. They obviously don't want to be the straw that breaks the camel's back in the fixed-income markets," Compton said.

Josh Rosner, an analyst at independent research firm Graham Fisher in New York, said the rating agencies are in violation of the IOSCO code of conduct, a voluntary global industry code on transparency.

Rating firms "are explicitly not supposed to base their decisions on the potential impact to companies, investors, markets or the economy," as they appear to be doing in this case, Rosner said.

The time being given to bond insurers to raise more cash "is arbitrary and without precedent," he said.

TAKING THEIR TIME

Indeed, Moody's and Standard & Poor's have acted much more swiftly in the past, analysts said.

Janet Tavakoli, a structured finance analyst, points to the relatively quick rating actions on CapMAC, a monoline bond insurer that was eventually absorbed by MBIA in the late 1990s.

But with global investors nervous about the fate of the bond insurers and any ripple effects on the broader financial system, the stakes may now be too high.

"Everybody's looking for a constructive solution here," Tavakoli said. "It's in the interest of everybody in the capital markets to see something worked out that is reasonable."

(Additional reporting by Dan Wilchins in New York; editing by Clive McKeef)