Credit rating firms seen holding back on bond insurers

By Neil Shah - Analysis

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.