NEW YORK (Reuters) - Standard & Poor's on Thursday cut its "AAA" ratings on FGIC Corp's bond insurance arm, and placed its top ratings on the bond insurance arm of MBIA Inc <MBI.N> on review for downgrade.
By Karen Brettell
NEW YORK (Reuters) - Standard & Poor's on Thursday cut its "AAA" ratings on FGIC Corp's bond insurance arm, and placed its top ratings on the bond insurance arm of MBIA Inc <MBI.N> on review for downgrade.
The rating agency also said it may cut the "AAA" rating of XL Capital Assurance Inc, the bond insurance arm of Security Capital Assurance <SCA.N>
The rating action is a blow to bond insurers that are scrambling to raise capital required to hold their top ratings. The companies are at risk of losing the ratings because of expected losses from risky residential mortgage securities in their insurance portfolios.
!ADVERTISEMENT!The New York State Insurance Department has been working with banks on a fix for bond insurers, though some analysts have said any plan is likely to come too late to save the ratings.
S&P cut Financial Guaranty Insurance Co's "AAA" insurer financial strength rating by two notches to "AA." It also cut parent company FGIC Corp's long-term rating by three notches to "A," the sixth-highest investment grade, from "AA."
FGIC is owned by a group that included mortgage insurer PMI Group Inc <PMI.N> and private equity firms Blackstone Group <BX.N>, Cypress Group, and CIVC Partners LP.
S&P's review on MBIA was at odds with reassurances made earlier by the company's Chief Financial Officer C. Edward Chaplin about its "AAA" rating.
Chaplin said on a conference call that S&P had indicated the insurer's capital plan was sufficient for keeping the rating. He also said he expected an "affirmative" outcome from Moody's Investors Service's review of its "AAA" rating.
Difficulties at MBIA, the largest bond insurer, and the industry could have a huge impact on credit markets. As downgrades roll in, investors who can only own top-rated instruments will have to sell their securities, pushing bond values lower.
Those price declines would deal another blow to investors already reeling from the subprime mortgage crisis.
"I hope they (regulators, credit agencies) realize the depth of how much...this really runs through just about everything -- mutual funds, corporations, closed end funds, tender option bonds, all the way down to the individual investors," said Glenn Williams, managing partner at Philadelphia-based Grant Williams. Moreover, "you could hypothetically freeze out issuers from being able to issue muni debt," he said.
Municipal bonds have one of the lowest default rates in the world of less than 1.0 percent, but many issuers bought insurance because it makes it easier to market their bonds.
States, counties, cities and towns have sold about $2.5 trillion of debt to pay for new schools and roads, for example, and about half of that debt is backed by bond insurance.
As of the end of September last year MBIA guaranteed $673 billion in debt, $240 billion of which was on structured deals known as collateralized debt obligations (CDOs). Residential mortgage backed debt comprised 22.3 percent of this portfolio, with an additional 17.9 percent being backed by commercial mortgages.
FGIC is the fourth-largest bond insurer, with about $314.8 billion of outstanding bonds insured as of the end of September, most of it municipal bonds. The total also included about $31 billion of mortgage-backed securities and $28 billion of collateralized debt obligations.
Through the end of September, XL Capital Assurance had insured about $154 billion in securities.
(Additional reporting by Dena Aubin and Joan Gralla in New York)
(Reporting by Karen Brettell)
