Financial Guaranty Insurance Co. was downgraded by Standard & Poor’s yesterday to AA from AAA, based on the rating agency’s most recent downg ades of residential mortgage-backed securities, some of which are guaranteed by FGIC. The insurer remains on credit watch with developing implications.
At the same time, Standard & Poor’s placed MBIA Insurance Corp. and XL Capital Assurance Inc. on credit watch with negative implications. The triple-A rating so far remains intact for both insurers.
FGIC has had more than a month to announce a capital raising plan, but so far has remained silent.
“The rating actions are the result of our most recent review of all the bond insurance companies’ capital plans,” Standard & Poor’s said in the release. “Our review covered the scope of each plan relative to the projected losses for that company, the success each company has had to date in implementing its plan, and our assessment of the likelihood that the companies could implement the remaining components of their plans.”
Among market sources, the downgrade did not surprise many. Standard & Poor’s last put out a report concerning the bond insurers in December, and last month revisited its loss projections for residential mortgage-backed securities and the collateralized debt obligations they back.
On Jan. 17, when Standard & Poor’s released the results of their latest bond insurer stress tests, they said FGIC’s capital cushion stood at $300 million to $350 million. XL Capital’s cushion stood at $600 million to $650 million after the most recent stress tests, and MBIA’s stood at roughly $1.8 billion, the rating agency said at the time.
Many of the bond insurers have guaranteed collateralized debt obligations and other debt instruments backed by these securities. As their values have fallen, loss projections have undercut the capital cushions held by the bond insurers.
“Obviously, we knew Standard and Poor’s was looking,” said Jerry Solomon, senior managing director and municipal bond analyst at Bear, Stearns & Co. “It’s been a month plus since Standard and Poor’s did their initial actions on the bond insurers and we all know that some of the insurers have gone out looking for capital and have been unsuccessful.”
Wednesday evening, Standard & Poor’s downgraded a raft of residential mortgage-backed securities and CDOs. More than 6,300 residential mortgage-backed securities transactions backed by first-lien subprime mortgages rated between January 2006 and June 2007 were placed on credit watch or outright downgraded, while almost 2,000 ratings from collateralized debt obligations of asset-backed securities or “CDOs of CDOs” were placed on negative watch.
The models used to evaluate the vintages of the RMBS have had to change as the loss projections have changed.
“As current conditions get worse, the projections of what might happen also get worse,” said Matt Fabian, managing director at Municipal Market Advisors. “As defaults continue to happen, the projections of subprime losses are actually going to get worse too,”
The latest action by Standard & Poor’s is the first downgrade of a triple-A bond insurer done by an agency other than Fitch Ratings. With this downgrade, it shows that the bond insurer’s problems are not just consigned to the models run by Fitch, but by the other rating agencies as well.
“This shows that the current problems are not just a Fitch problem,” Fabian said. “It’s crushing for not just FGIC but also [Ambac Assurance Corp.] and XL, because it shows that Fitch’s concerns are not just Fitch’s concerns.”
Standard & Poor’s said that the rating reflected FGIC’s capital deficiency and said it may be downgraded further if the bond insurer is ultimately unsuccessful in raising capital.
