Moody’s Investors Service placed the Baa2 insurance financial strength rating of National Public Finance Guarantee Corporation on review for downgrade Thursday evening.
The ratings agency also placed on review the Caa2 rating of MBIA Insurance Corporation and the Caa1 senior debt rating of parent company MBIA, Inc.
An MBIA spokesperson declined to comment.
“[Thursday’s] rating action reflects the precarious financial condition of MBIA Corp. and the adverse effect that its weak credit profile and a possible related regulatory action could have on the MBIA group,” Moody’s analysts wrote in a report. “Given its very tight liquidity position, MBIA Corp. may not have enough resources to pay [commercial mortgage-backed securities] claims that could be presented this year and there is thus a high risk of regulatory action.”
Moody’s said the regulatory action could expose MBIA to possible termination of its credit default swap exposure at substantial market value losses, overwhelming its financial resources.
The report also noted the $1.7 billion secured loan that National made to MBIA Corp., saying it represents a majority of the company’s equity and exposes National to potential losses and payment disruptions in the event of regulatory action.
“Should the loan become impaired, National’s ability to pay dividends to cash poor MBIA Inc. may be further constrained and its ability to write new business may be further delayed,” Moody’s said.
The review will focus on the risks to the group presented by MBIA Corp.’s CMBS exposure, the effect of a possible regulatory action, and risks to National stemming from its secured loan. Moody’s will also assess any potential developments related to putback claims and litigation.
The action follows Standard & Poor’s downgrade of National to BB from BBB and MBIA Corp. to CCC from B earlier this month. The agency affirmed the B-minus rating of MBIA Inc.
Fitch Ratings does not rate the bond insurers.
The action also follows the more recent positive judicial decision validating the 2009 regulatory approval of the split of MBIA’s insurance operations. Despite this, Moody’s said that MBIA Corp.’s “deteriorating condition” is adversely affecting the rest of the group.
If MBIA Corp. were able to substantially reduce the downside risks of its insured portfolio and significantly improve its risk-adjusted capitalization, its rating could be confirmed or even upgraded.
Thursday’s action has implications for the various transactions wrapped by MBIA Corp. and National, which usually have ratings maintained at the same level as the insurer.
Depending on the transaction, they were either put on review for downgrade, affirmed, or outlook changed to under review.
Matt Fabian, managing director at Municipal Market Advisors, said after Standard & Poor’s downgrade that the drop to a speculative grade should have minimal impact. With the bond insurer facing another possible junk rating, he still holds that view.
“It’s probably fair to assume that few people are relying on the monoline insurer ratings as a major input to their pricing models,” Fabian said. “Frankly, the faster some insured munis lose their insurance ratings, the better those munis might trade.”
MBIA shares appeared not to be impacted much by the action, hovering around Thursday’s $11.15 closing price on Friday afternoon.
