Sell Side

Fitch Drops FGIC to Double-A

Fitch Ratings downgraded Financial Guaranty Insurance Co. to AA from AAA yesterday, saying the bond insurer has failed to address the capital shortfall it needed to maintain is vaunted triple-A rating. FGIC remains on watch for further downgrades.

On Dec. 17, Fitch placed FGIC on negative watch, giving the financial guarantor four to six weeks to address a capital shortfall of more than $1 billion. The six weeks ended Monday without a public word from FGIC, and while Fitch managing director Tom Abruzzo said it was not a strict deadline, the rating agency felt it could wait no longer.

“[The date] wasn’t hard coated per se, but at some point we felt it necessary to comment given our previous statements,” Abruzzo said. “In the last six-plus weeks there hasn’t been anything on their part that has been executed that has helped plug the hole or addressed any of that deficiency. Based on what we felt and what we have seen, we felt it was prudent to go ahead and take this action.”

FGIC joins Ambac Assurance Corp. and Security Capital Assurance Ltd.’s XL Capital Assurance as the only triple-A bond insurers to be downgraded. Fitch knocked Ambac down to AA and downgraded XL Capital to A earlier this month, while keeping both of them on negative watch.

Fitch downgraded Ambac and XL after they publicly announced they would not pursue certain aspects of their capital plan.

“These were companies that weren’t able to address the capital raising or enhancement,” Abruzzo said. “Obviously other companies such as [MBIA Insurance Corp.] and [CIFG Guaranty Assurance NA] did and as a result they were able to keep their AAA ratings.”

MBIA raised about $2 billion in needed capital through an infusion of capital from private equity firm Warburg Pincus LP, and a $1 billion sale of surplus notes. CIFG announced an extra $1.5 billion infusion from the two French banks that own the insurer.

Standard & Poor’s rates MBIA AAA with a negative outlook, Moody’s Investors Service rates MBIA Aaa, on negative watch, while both agencies assign a triple-A rating, with a negative outlook for CIFG.

In yesterday’s announcement, Fitch said FGIC’s capital deficiency was more than $1.3 billion based on the fall in the value of collateralized debt obligations backed by subprime residential mortgage-backed securities, most notably second-lien mortgages.

Abruzzo said the value of the shortfall was a refinement of the number Fitch used in December and does not reflect additional losses.

Fitch also downgraded more than 113,000 bonds insured by FGIC. More than 5,300 bonds remained at credit rating levels of AA or higher, due to Fitch’s recent policy changes regarding bonds with no underlying ratings from the agency.

FGIC could not immediately be reached for comment.

“The FGIC downgrade was not a surprise,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC. “Over the course of the last week or two we had been hearing musings that a downgrade of FGIC was in the works.”

FGIC is owned by a group of firms including Blackstone Group LP, Cypress Group, CIVC Partners LP, and PMI Group Inc. And while PMI Group, a mortgage insurer, doesn’t have the capital to contribute, private equity firms Blackstone and Cypress do have the capital, but have chosen not to put it to work, LeBas said. Earlier this month, Blackstone said it would write down a portion of its investment in FGIC.

“The real question is why hasn’t the company been able to raise capital in the past from these investors,” LeBas said. “The capital exists, it just hasn’t hit the balance sheet.”

Standard & Poor’s and Moody’s both maintain a triple-A rating for FGIC, and both agencies have the bond insurer on review for possible downgrade. The lack of capital raising may lead Standard & Poor’s or Moody’s to take action shortly, LeBas said.

FGIC was the fourth-busiest bond insurer last year, wrapping 377 deals worth a combined $29.6 billion — about 14.7% of all insured bonds. However, FGIC failed to insure a single deal in December or January after the monoline’s exposure to credit derivatives became known and many market sources expected the downgrade.


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