NEW YORK, Jan 29 (Reuters) - An attempt by a New York insurance regulator to bailout monoline bond insurers is coming “too late” to avert ratings downgrades, with a broader multi-faceted regulatory response likely required, CreditSights said on Tuesday.
Sources last week said New York State Insurance Superintendent Eric Dinallo had pressed banks to put up cash to shore up bond insurers, whose expected losses from securities linked to subprime mortgages have mounted.
“Given the number of competing interests and levels of commitment of participants involved, we think it is unlikely that an agreement sponsored by Dinallo could be hammered out within the appropriate timeframe,” CreditSights analysts said in a report.
“Moreover, Dinallo lacks any regulatory authority over the banks,” they said. “In the off chance that any deal could likely be solidified, the rating agencies are likely to have already taken action.”
The “AAA” ratings of monoline bond insurers are under threat as ratings agencies require that they raise additional capital to hold the top ratings, after revising loss forecasts due to deterioration in risky residential mortgages.
Fitch Ratings this month cut the insurance arm of Ambac Financial Group ABK.N after it said it no longer planned an equity offering designed to shore up its capital base, and analysts expect a downgrade of FGIC Corp to happen soon.
“Essentially, the markets and the rating agencies have set into motion a self-fulfilling prophecy which could now lead to further downgrades,” the CreditSights analysts said.
“As the rating agencies have continued to move the AAA capital requirements higher and higher, the markets have taken a more bearish stance towards the sector which, in turn, has effectively cut the sector off from the debt and equity markets where they were planning to raise much of that capital,” they said.
Monoline insurers are estimated to insure around $2.5 trillion in debt globally, much of which is municipal debt.
“The viability of the municipal debt markets is clearly in the public interest, not least because widespread defaults could potentially create demands for an even more costly federal bailout,” the analysts said. (Reporting by Karen Brettell; Editing by Theodore d’Afflisio)