Sell Side

Mixed Bag For Bond Insurers

Friday was a mixed bag for the bond insurers, as one of them successfully raised capital, another was downgraded, and a third asked for one of its rating to be removed.

Late Friday, MBIA Inc. asked Fitch Ratings to immediately remove its insurer financial strength rating on a number of subsidiaries, including that of the financial guarantor, MBIA Insurance Corp. Fitch currently rates MBIA Insurance AAA, with a negative watch.

At the same time, MBIA asked Fitch to continue to rate a number of outstanding debt offerings.

Also Friday, Fitch lowered the insurer financial strength rating of CIFG Guaranty to AA-minus from AAA, reflecting concerns that the two French banks that own large stakes in the financial guarantor's parent, CIFG Holdings Ltd., will not commit the capital needed to keep the bond insurer at triple-A.

"This action on CIFG Guaranty and its affiliates is based on Fitch's view that CIFG's shareholders may be less willing to provide further capital support to CIFG in the future than in the past," Fitch said in a statement. "Unquestioned capital support from large, strong shareholders has been a key qualitative aspect of CIFG's AAA insurer financial strength rating historically."

The ratings remain on negative watch, pending the completion of ongoing analysis. Within its analysis, Fitch will examine the commitment of CIFG's parents, the future prospects for the monoline's franchise, and its competitiveness among its financial guaranty peers. Fitch said CIFG will likely need "considerably more capital resources," and said it is "highly probable" that CIFG's rating will be further downgraded sometime soon.

Fitch also said expected losses for the collateralized debt obligations guaranteed by CIFG are likely to increase materially, given that CIFG holds a number of mezzanine-level CDOs in its portfolio.

The Fitch comments sound similar to those made by Moody's Investors Service, which downgraded CIFG to A1 from Aaa on Thursday. Standard & Poor's, on the other hand, reaffirmed CIFG's AAA rating Feb. 25 and kept it on negative watch.

"CIFG is now in the unusual position of having three disparate ratings, which is sure to cause confusion among investors and issuers," said John Pizzarelli, chief executive officer of CIFG, in a statement. "Because each of the rating agencies is using a different methodology, it is very difficult for financial guaranty companies, like CIFG, to satisfy the divergent rating agency requirements."

Pizzarelli went on to say that he is committed to building CIFG's business franchise when market conditions return to normal, and will work with the rating agencies to get the ratings back to triple-A.

Two banks that are the largest shareholders of CIFG Holding, Caisse Nationale des Caisses d'Epargne and Banque Federale des Banques Populaires, contributed $1.5 billion in capital to the financial guarantor in December. The capital had been responsible in part for Fitch's maintenance of CIFG's AAA rating, before last week, the rating agency said.

Since December, the banks have had troubles of their own related to subprime mortgage exposure. On Thursday, the French bank Natixis - of which the two banks hold more than two thirds, after merging their respective investment banking units - reported a net loss of $1.4 billion for the fourth quarter of 2007.

Under Fitch's ongoing analysis, CIFG may suffer from its relatively recent entrance into the municipal market. CIFG was established in 2001 and holds licenses in most states, but has yet to become one of the major players. In 2007, CIFG ranked sixth among the nine bond insurers, with 353 issues insured for a total value of $4.7 billion.

Fitch said the downgrade will also affect the ratings of 8,885 municipal issues, including 466 CIFG-insured bonds rated AA-minus or higher, the rating on which will revert to the underlying rating of the bonds. This is in keeping with Fitch's stated policy to keep the rating at the higher of the underlying or insured rating.

Meantime, Ambac Financial Group Friday said it had priced more than 171 million shares of common stock, raising a total of $1.15 billion. The shares were sold at a value of $6.75. Ambac granted the underwriters of the sale a 30-day option to sell an additional 25.7 million shares to cover over-allotments.

Ambac also raised $250 million through the sale of five million equity units, which would be allowed to appreciate to a premium of 18% above the price at which the common stock was sold. Ambac also granted the underwriters a 13-day option to purchase an additional 750,000 equity units.

At the same time, the bond insurer said it had privately placed more than 14 million shares, for value of $95 million, with two financial institutions that it refused to name. With the addition of the newly sold shares to Ambac's current 101.6 million, the total outstanding shares will more than triple.

The capital raising plan is an effort to protect Ambac Assurance Corp.'s triple-A rating, negotiated by a number of parties including financial firms and banks, government regulators, and the rating agencies. Though some market participants believe the capital ultimately may not be enough if credit market worsen, New York Gov. Eliot Spitzer and Ambac have said the capital raising is a positive step.

"We're happy with it and they're happy with it," Spitzer said Friday. "I think everybody should be happy and satisfied that this was a good step forward to stabilize what could have been a very uncomfortable situation."

Ambac shares rose 28.3%, or $2.08, to $9.50, in trading on the New York Stock Exchange Friday.


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