S&P downgrades National Public Finance Guarantee to junk

Standard & Poor’s downgraded bond insurer National Public Finance Guarantee three notches to BB from BBB Thursday evening.

S&P also downgraded sister company MBIA Insurance Corp. to CCC from B. It affirmed its B-minus grade on parent company MBIA Inc.

MBIA Insurance Corp. insures structured finance products.

S&P took the action on National because of its concern about its capital adequacy position and financial risk profile. It looks that an intercompany loan from National to MBIA Insurance Corp. will not be repaid within 12 months or before New York regulators take over MBIA Insurance Corp., S&P analyst David Veno wrote.

“If MBIA Corp. does fall under regulatory control, National’s ability to claim the perfected security interest is uncertain, in our view,” Veno wrote.

In its analysis of National’s capital adequacy, S&P has therefore included a 100% charge for the intercompany loan.

MBIA Inc. spokesman Kevin Brown responded, “Despite S&P’s rating action, National’s capitalization remains consistent with an investment grade rating even under a highly speculative scenario where its secured loan to MBIA Corp. is not repaid due to regulatory intervention.  The loan was approved by the New York State Department of Financial Services and is secured by a pledge of collateral having an estimated value substantially in excess of the notional amount of the loan.  National will continue to meet all of its obligations to policyholders.”

Moody’s currently rates National at Baa2 with a negative outlook. It rates MBIA Inc. senior unsecured debt Caa1 with a developing outlook. It rates the insurance financial strength of MBIA Insurance Corporation at Caa2, also with a developing outlook.

Fitch Ratings does not rate the bond insurers.

The bond insurer ratings have been going down for years, noted Matt Fabian, managing director at Municipal Market Advisors. Most investors, including retail investors, do not pay much attention to bond insurer ratings anymore, Fabian said. S&P’s drop of National to a speculative grade should have minimal impact.

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