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Moody's Warns Assured of Possible Downgrades

Moody’s Investors Service is warning that it may downgrade Assured Guaranty Corp., Assured Guaranty Municipal Corp., and all affiliated insurance operating companies, an action that might make it difficult for the bond insurer to attract new business.

Moody’s has had a negative outlook assigned to AGM and AGC’s Aa3 ratings since December 2009.

Late Tuesday the agency announced that it had placed the companies’ ratings on review for downgrade. By the close of the stock market on Wednesday, Assured’s stock had gone down 13.4%.

Negative outlooks indicate that the rating might be downgraded within 12 to 18 months.

Moody’s usually resolves reviews for downgrades or upgrades within 90 days, according to a source.

“Today’s rating action reflects Moody’s opinion that Assured Guaranty’s business and financial profiles may have meaningfully deteriorated due to the firm’s narrower opportunities and substantial exposure to sectors adversely affected by the financial crisis and current economic stress,” said Moody’s associate managing director Stanislas Rouyer.

Moody’s said three factors were key to its rating review.

First, it cited “constrained business opportunities reflecting lower origination volume and reduced demand for financial guaranty insurance across sectors.”

The second factor was “continued economic stress in the U.S. (e.g. mortgage and municipal finance) and in Europe resulting in an elevated portion of Assured Guaranty’s portfolio in risks assessed as below investment-grade.”

Third, Moody’s warned of “pressure on new business margins due to low interest rates and tight credit spreads.”

Assured Guaranty’s “elevated below-investment-grade exposure, across a range of sectors including residential mortgage-backed securities, trust-preferred, and municipal risks, which by Assured’s estimate stood at about 4.3 times qualified statutory capital and loss reserves and 2.2 times total reported claims-paying resources, could leave the firm particularly exposed to further deterioration,” Moody’s said.

Any downgrade would be by one or two notches, it said.

The agency also announced that its ratings on bonds wrapped by the firms are also being placed on review for possible downgrade, except those with equal or higher published underlying ratings.

Similarly, Moody’s has placed on review for downgrade various companies associated with those two firms, such as Assured Guaranty (UK) Ltd. and AGM Guaranty (Bermuda) Ltd.

On Nov. 30, Standard & Poor’s downgraded Assured Guaranty Ltd. to AA-minus from AA-plus. It has a stable outlook on this new rating.

Dominic Frederico, president of Assured Guaranty Ltd., said in a statement responding to Moody’s action: “In light of our improved financial strength over the last two years, Moody’s action was unjustified and unwarranted. Assured Guaranty has not just, as Moody’s writes, 'survived’ the financial crisis but has demonstrated its resiliency, resourcefulness, and financial strength. … Our claims-paying resources to protect policyholders have grown from $11.2 billion in 2007 to over $12.8 billion today.”

“Because of our confidence in our representation and warranty rights, we anticipate that the bulk of our residential mortgage-backed securities losses will ultimately be paid by third parties,” Frederico wrote.

Any downgrade by Moody’s from the current Aa3 would push Assured Guaranty below the double-A level.

After Standard & Poor’s downgrade in November, Rob Haines, senior insurance analyst at CreditSights, said: “If they had fallen out of the AA [class], that really would have been devastating to their business.” Haines could not be reached for comment for this story.

If a downgrade occurs, Assured’s business model would be hurt, said Alan Schankel, managing director of fixed-income research at Janney Capital Markets.

The credit downgrade would also negatively affect the trading of bonds wrapped by Assured in the secondary markets, he said.

Nevertheless, Assured is well-capitalized and is unlikely to go out of business any time soon, Schankel said.

Moody’s review will not necessarily result in a downgrade and, regardless, Assured Guaranty will retain Standard & Poor’s AA-minus rating, according to Mark Palmer, managing director at BTIG LLC.

Referring to Moody’s statement about continued U.S. economic stress, Palmer pointed to a March 7 study of muni defaults by Moody’s that said: “We expect municipal debt defaults will remain infrequent and isolated events.”

While bond insurers backed 57% of the new-issue municipal market in 2005, Assured, as the last remaining active muni bond insurer, guaranteed just 5.2% of the market in 2011.

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