NEW YORK (Reuters) - Moody's Investors Service on Wednesday said it is likely to cut the top ratings of the bond insurance arms of MBIA Inc (MBI.N) and Ambac Financial Group ABK.N, in a move that may cripple their ability to write new insurance.
The No. 1 and No. 2 companies in the business, both have been struggling to raise capital to shore up their top ratings, which are under pressure on concern that losses from mortgage backed debt will outpace present estimates.
"They are in a weaker position today than they were a year ago before the mortgage crisis and the situation doesn't seem to be getting better in that regard," said Jack Dorer, managing director in Moody's financial guarantor team in an interview.
Plunging share prices and the high cost of accessing the debt markets is hampering both companies' ability to raise new funds, Moody's said.
"Our methodology talks a lot about capital as being important, but there are many other elements we talk about as well, among which are the strength of the franchise as well as financial flexibility," Dorer said.
Shares of MBIA and Ambac dipped more than 15 percent on Moody's action and the cost of insuring their debt with credit default swaps jumped.
MBIA's stock is trading at around $5.50 a share, compared with a record high of $76 in January 2007. Ambac's stock is trading at less than $2.5 a share, compared with a record high above $96 in May 2007.
"The companies are cut off from writing new business; they are essentially cut off from capital markets right now," said Rob Haines, analyst at independent research firm CreditSights. "The longer they are cut off, the longer they will see franchise damage to their business and all they are selling is confidence."
Moody's said it is likely to cut the ratings on MBIA Insurance Corp and Ambac Assurance Corp to the "Aa" level, which is one to three notches lower than their current rating. A drop to "A" area is also possible for MBIA.
A larger cut is possible for MBIA as they are starting with a weaker capital position, Dorer said.
A downgrade would effectively end both insurer's business, as the quality of their guarantee was contingent on holding the top ratings, analysts said.
"I think it's likely that they are probably going to lose their AAA," said Haines. "I think the companies are likely to go into a run off mode." In "run off mode" the insurers would continue to pay claims on existing insurance policies but would stop writing new business.
In a statement, MBIA said that is surprised by Moody's action and that its capital position has improved.
"There is no question about our ability to cover all policyholder claims, from a regulatory or any other standpoint," MBIA said. The insurer added that as a result of Moody's action, the company will hold $900 million in capital at the holding company that it had intended to downstream to its insurance arm to shore up its rating.
Ambac also said that it believes its capital position is sufficient for an "Aaa" rating and added that it has no plans to raise additional capital.
MBIA, the world's largest bond insurer, had guaranteed $668 billion in debt as of the end of the first quarter of 2008, while Ambac, the second largest insurer, has an insurance portfolio of $511 billion.
The majority of the insurance guarantees payment on municipal bonds. The ratings on these securities are also likely to be cut, except when the rating of the underlying bond is higher than that of the insurers.