Fitch Ratings yesterday placed the insurer financial strength rating of MBIA Insurance Corp. and CIFG Assurance NA on negative watch while affirming their AAA ratings, saying continuing loss estimates on subprime mortgage-backed securities had led the agency to revise its earlier models. Fitch said adequate capital reserves may no longer be enough to prevent downgrades.
"Fitch believes it is possible that modeled losses for structured finance collateralized debt obligations could increase materially," the rating agency said in a report. "A material increase in claim payments would be inconsistent with AAA ratings standards for financial guarantors, and could potentially call into question the appropriateness of AAA ratings for those affected companies, regardless of their ultimate capital levels."
Less than three weeks ago, Fitch reaffirmed MBIA's triple-A rating and moved the bond insurer off of ratings watch negative to stable after the financial guarantor successfully sold $1 billion in surplus notes. The notes, and a subsequent $500 million capital infusion from private equity firm Warburg Pincus LP, were intended to address a $2 billion shortfall Fitch said was needed for MBIA to maintain its triple-A rating.
MBIA declined to comment. CIFG was unable to comment at press time.
"They affirmed MBIA three weeks ago and now all of a sudden based on a change in assumption they are threatening to downgrade it again," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC. "This indicates to me that the capital needs of these monolines are a moving target. And it's hard to hit a moving target."
In late November, CIFG received an extra $1.5 billion in capital from its french bank parents, Banque Populaire Group and Caisse d'Epargne Group. The infusion was intended to address the rating agencies' views that the bond insurer was in danger of losing its capital cushion.
Fitch said in the release that an increase in expected losses could cause financial guarantors to pay future claims, which Fitch said could be an even bigger problem than meeting the triple-A capital guidelines. Meeting Fitch's capital guidelines has been the most recent hurdle for bond insurers.
Fitch has been more active than the other two rating agencies in announcing downgrades and speaking out on the ability of bond insurers to meet their capital guidelines.
"Whatever credibility Fitch might have been trying to gain by being the first to pull the trigger on bond insurer ratings is fading fast," said Richard Larkin, senior vice president and municipal trading desk analyst at JB Hanauer & Co.
Both Standard & Poor's and Moody's Investors Service, in explaining their reluctance to take action, have said their ratings take into account much more than capital reserve requirements. LeBas said that Fitch's recent adherence to capital levels may be that, as the newest bond insurer, Fitch's models are more quantitative than the others.
"I think Fitch to a degree is a late comer in the ratings and they have relied largely on quantitative solutions rather than qualitative ones," LeBas said. "Whereas Moody's and Standard & Poor's have been around for [a long time], and they have focused on a qualitative approach as much as a quantitative one."
Fitch also said in its release that while it holds a stable, AAA rating on Financial Security Assurance Inc., it will continue to monitor the deteriorating performance of CDO-related credit linked notes associated with FSA's guaranteed investment contract business. Fitch said the flagging performance would not lead to a direct credit loss, though early withdrawals of certain liabilities could add to liquidity requirements.
Betsy Castenir, a spokeswoman for FSA, said Fitch mentioned FSA's GIC business in a Jan. 18 release, and that the latest announcement was nothing new. She said FSA is also monitoring the GIC business, and said the company is "very comfortable" with its performance.
Meanwhile, Standard & Poor's released a report yesterday that said further downgrades to the bond insurers could cause downgrades at banks that have exposure to the monolines. Standard & Poor's said $125 billion of subprime-related CDOs hedged by bond insurers remains concentrated in the hands of a few large banks.
Those banks continue to seek ways of supporting the financial guarantors' triple-A ratings, as the Wall Street Journal reported yesterday that a second group of banks is looking to bailout monoline bond insurer Financial Guaranty Insurance Co. The group is said to be led by French investment bank, Calyon, and includes UBS, Societe Generale, Citi, and Barclays.
As market sources said about a group looking to help bolster Ambac Assurance Corp., the banks in this group are likely to be those most exposed to FGIC. One source said it would not be a surprise if there were as many groups looking to bail out the bond insurers as there are financial guaranty companies. q
