Standard & Poor's Rating Services said Monday it has raised its long-term issuer credit ratings on Radian Group Inc. (RDN) to CCC-plus from CCC-minus and MGIC Investment Corp. (MTG) to CCC-plus from CCC.
The financial strength ratings for both RDN's and MTG's respective operating companies are unchanged. The outlook on both companies is negative.
"The rating actions for RDN and MTG reflect Standard & Poor's updated criteria for assigning CCC-plus, CCC, CCC-minus, and CC ratings," said Standard & Poor's credit analyst Ron Joas. "We associate each rating level with a distinct scenario or set of scenarios. The likelihood and time frame to anticipated default are the primary factors considered when assigning CCC category ratings, and the plus or minus sign modifier within the category."
A CCC-plus rating is assigned when: the issuer is currently vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments; and the issuer's financial commitments appear to be unsustainable in the long term, although it may not face a near-term (within 12 months) credit or payment crisis.
RDN had total cash and investments of $350 million at the holding company as of June 30, 2012, $50 million or more of which we expect to be downstreamed to the operating companies within the next 12-18 months to meet the regulatory risk to capital requirement of 25x to continue writing in new business.
RDN's operating companies have reported significant losses over the past several years and have been unable to provide dividends to the holding company. Operating losses are expected to continue into 2014 and, barring more significant improvement in the job markets, may continue even longer. As a result, while S&P believes RDN will be able to repay the $92 million in outstanding 2013 debentures in February 2013, unless there is significant improvement in its financial condition, RDN is likely to default on the $250 million debentures due in 2015.
MTG had total cash and investments of $400 million at the holding company as of June 30, 2012, $100 million of which is to be downstreamed to its operating company, Mortgage Guaranty Investment Corp. (MGIC) by Dec. 1, 2012, under terms provided to MTG by Freddie Mac.
Similar to RDN, MGIC has reported significant losses for several years and has been unable to provide dividends to the holding company. S&P expects MGIC to continue reporting operating losses into 2014. MTG had about $100 million par outstanding of the 5.375% senior notes due in November 2015 and has deferred interest payments on the 9% junior subordinated debentures due in 2063 to conserve cash and capital. As a result, although MTG as a group is currently vulnerable, S&P believes it will be able to repay the 2015 debentures outstanding. Nevertheless, MTG currently does not have the ability to repay the $345 million 5% 2017 debentures outstanding and unless there is significant improvement in its financial condition, it will be challenged to repay these notes.
"The outlook for each company is negative, reflecting the continuing risk of significant adverse reserve development; the current trajectory of operating performance; and the expected impact ongoing losses will have on their capital positions," Joas continued. "We expect operating performance to deteriorate for the rest of the year for both companies, reflecting the effect of normal adverse seasonality on new notices of delinquency and cure rates, and the lack of greater improvement in the job markets."
As indicated in the updated criteria, an issuer expected to default without an unforeseen positive development within a 12-month time frame is rated a CCC, and CCC-minus where the default appears inevitable within a six-month time frame. Accordingly, S&P said it will lower its ratings on MTG and RDN as the time frame compresses and the companies continue to lack the ability to repay their outstanding maturities.
