NEW YORK (Reuters) - Standard & Poor’s on Wednesday slashed its outlook for bond insurers Ambac Financial Group, MBIA Insurance Corp and XL Capital Assurance, indicating their triple-A credit ratings were at heightened risk of being cut in the next two years due to deteriorating mortgage debt.
S&P now has a “negative” outlook for those bond insurers. It also is reviewing Financial Guaranty Insurance Co, a unit of Blackstone Group LP (BX.N), for a downgrade, citing deteriorating performance of mortgage debt and collateralized debt obligations.
“The rating actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage-backed securities and CDOs of asset-backed securities,” S&P said in a statement.
FGIC late on Wednesday responded that it is pursuing a plan to build capital, and intends to satisfy capital requirements needed to preserve its triple-A credit rating from Standard & Poor’s.
Shares of both Ambac Financial ABK.N and MBIA Inc (MBI.N), the world’s biggest bond insurers, ended lower, with Ambac down 1.8 percent at $27.46 on the New York Stock Exchange and MBIA down 2.5 percent to $27.02.
XL Capital Assurance is a unit of Security Capital Assurance (SCA.N).
S&P also cut its ratings on ACA Financial Guaranty Corp to junk status. ACA’s rating was lowered to “CCC,” or eight levels below investment grade, from “A,” the sixth-highest investment-grade rating.
ACA’s “capital resources may no longer be sufficient at their respective rating levels,” the rating company said.
“Another consideration in the analysis, if there is a capital shortfall, is the magnitude of the shortfall and the extent to which the company has raised or is planning to raise new capital, and the viability of that capital plan,” S&P said.
Canadian Imperial Bank of Commerce (CM.TO) said on Wednesday that there was a “reasonably high probability” that it will incur a large write-down in its first-quarter results due to its exposure to ACA. CIBC declined to comment on whether it is involved in a bailout of ACA.
At the same time, S&P affirmed the top “AAA” ratings of Assured Guaranty Ltd (AGO.N) and CIFG Guaranty. It also affirmed the ratings of Financial Security Assurance Holdings, Radian Asset Assurance and PMI Guaranty Co.
Egan-Jones Ratings Co. said last month a downgrade would likely mean ACA would have to close.
“If ACA were downgraded, it would likely go out of business,” Sean Egan, of Egan-Jones, said at the time.
But Merrill Lynch & Co Inc MER.N, Bear Stearns Co Inc BSC.N and other large banks are in talks about bailing out ACA, the New York Times reported on Wednesday, citing two people briefed on the situation.
“We were aware of it,” S&P analyst Dick Smith said during a conference call Wednesday afternoon. ACA’s rating status is “Credit Watch Developing,” Smith said, which “indicates that there (is) a positive outcome possible.”
S&P analysts also said the removal of negative outlooks on Ambac, MBIA and XL Capital will depend not only on efforts to raise capital but also unfolding events in the troubled credit markets.
“Time is really on the side of the insurers at this point,” one S&P analyst said. “It’s not as if the world is crashing in on them tomorrow.”
S&P’s negative outlook “is intended to cover a period of time that actually goes out for a three year period,” this analyst said.
Additional reporting by Neil Shah in New York; Editing by Diane Craft