Buy Side

Fitch Places MBIA On Negative Watch

Fitch Ratings announced yesterday it was placing MBIA Insurance Corp. on negative watch after a comprehensive review of its residential mortgage-backed security portfolio found that the financial guarantor’s capital model falls below the guidelines needed to hold a triple-A rating by $1 billion. Fitch said in a press release that it would return MBIA to a stable outlook if, in the next four to six weeks, the company was able to “obtain further capital commitments and or put in place reinsurance or other risk mitigation measures.” Fitch said this is in addition to the $1 billion investment promised to MBIA by private-equity firm Warburg Pincus LLC on Dec. 10. “If MBIA is unable to address its capital shortfall in the noted timeframe, Fitch would expect to downgrade MBIA’s insurer financial strength ratings by one notch to AA-plus,” Fitch said. Fitch's announcement comes a day after Standard & Poor’s gave the firm a negative outlook, while affirming its triple-A rating. Late Wednesday, MBIA announced that it had $30.6 billion of exposure to collateralized debt obligations potentially tied to subprime mortgages. Standard & Poor’s said it knew about the CDO exposure, and would not alter the company’s triple-A rating as a result. “I think the most important thing to realize was that all of this was known by the rating agencies when they came out [with updates of credit ratings for the financial guarantors] over the last couple of weeks,” said Morningstar Inc. analist Jim Ryan, who covers the stock of Ambac Assurance Corp. and Security Capital Assurance in addition to MBIA. Last week, Moody’s Investors Services issued a much-anticipated review of the bond insurers, and also gave MBIA a negative outlook. The latest news comes in the aftermath of the Standard & Poor’s credit rating report on Wednesday. In addition to moving MBIA to negative outlook, the agency also affirmed the triple-A rating for Ambac and XL Capital Assurance, while moving their outlooks to negative from stable. Standard & Poor’s also downgraded ACA Financial Guaranty Corp. to CCC from A, and placed triple-A rated Financial Guaranty Insurance Co. on negative watch. Equity investors reacted to the disclosure by selling MBIA stock, sending it down $7.07, or 26.2%, from an opening price of $23.63, at the close of trading yesterday on the New York Stock Exchange. The stock price opened the year at $73.10, but has lost 73% of its value since then. This is the latest activity in a tumultuous six-month period in the bond insurance industry, as the collateralized debt obligations insured by the financial guarantors have lost billions of dollars in mark-to-market values. It all began on July 31, when Fitch placed Radian Group Inc., including the financial guarantor subsidiary Radian Asset Assurance Inc., on negative watch after market dislocations caused the collateralized debt obligations that the company insures to lose value. In early September, Fitch went ahead and downgraded the company to A-plus from AA, citing worsening market conditions for CDOs backed by subprime mortgages and the failed merger of the company with MGIC Investment Corp. At the time many analysts discounted the Radian downgrade because it was the market’s second lowest-rated bond insurer, and because many felt certain that losses on subprime backed debt instruments would not be severe enough to challenge the large capital reserves held by the triple-A bond insurers. However, in the past month, Fitch, along with Moody’s and Standard & Poor’s, have announced internal studies of the balance sheets of the market’s bond insurers. On Dec. 12, Fitch placed the parent of XL Capital, Security Capital Assurance, on watch for possible downgrade below triple-A. Two days later, Moody’s issued a comprehensive analysis of the market’s financial guarantors, affirming bond insurers’ triple-A ratings, while putting XL Capital Insurance and FGIC on review for downgrade. Moody’s also changed the outlook for CIFG Guaranty, as well as MBIA, to negative from stable. Then, like a bombshell, Standard & Poor’s issued its report on Wednesday, sending ACA to below investment grade. The credit rating agency also said that 2,400 of the 3,000 credits insured by ACA would be rated CCC. Perhaps surprisingly, while the news did impact equities markets, it had little effect on the municipal market. Traders and portfolio managers said the market had already priced in ACA’s situation, along with the other insurance companies somewhat tenuous financial position. “For ACA you have to break it down to the underlying project and nothing else matters,” said Troy Willis, portfolio manager at OppenheimerFunds in Rochester, N.Y. “For the other insurers, they are definitely still worth something, you aren’t just looking at the underlying project.” Willis went on. “There is a market sentiment that the triple-A insurers are going to do what they have to do to keep that rating, they are going to get the injection of capital for the most part,” he added. As for why the difference in action between equities and munis, one portfolio manager put it this way. “Stock holders of a bond insurance company have completely different interests than I do,” he said. “I am holding their triple-A rating, that is what I look at and I don’t think that is going to change, whereas a stock holder probably is not holding on to the stock for as long as I am holding onto the bond, so they are going to sell it off.” As the picture gets more clouded, one area of the market that may feel the effects most acutely is in the municipal auction rate market. Such bonds typically reset on a weekly or monthly basis, and big news can sometimes move the resets dramatically. “If you go back a few months to when Radian was downgraded by Fitch, there was huge fall-out on the Radian auction-rate bonds that were outstanding to the point that a lot of those issues have been wrapped by letters of credit over Radian,” said Don Carlson, vice chairman and senior managing director at B.C. Ziegler & Co. However, it is still unclear how the market would respond if one of the credit rating agencies issued a downgrade that was not followed by the others. In other words, how would the market value a split rating? For Security Capital Assurance that could soon be a reality. In issuing their ratings review, Fitch and Standard & Poor’s have varied widely in the amount of capital they say SCA must raise to adequately cover the triple-A rating of XL Capital. Fitch said the company would need to raise $2 billion, while Standard & Poor’s on Wednesday said it was closer to $250 million. “One thing I’m trying to come to grips with is what happens if we get split ratings,” Morningstar’s Ryan said. “It appears that Fitch is taking a harder line on SCA than Standard and Poor’s or Moody’s. If we start getting split ratings I’m not sure where that leaves us.”


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