The financial strength rating of CIFG Guaranty was downgraded to A1 from Aaa by Moody's Investors Service yesterday, reflecting the rating agency's views on the monoline insurer's exposure to subprime mortgage-related risk, weakened capital position, impaired business prospects, and a strategic direction that remains unclear. The outlook remains stable.

"In Moody's opinion, CIFG's significant exposure to mortgage-related risk has materially adverse consequences for its business and financial profile beyond the associated impact on capitalization, and affects our opinion about CIFG's other key rating factors," Moody's said in a release.

CIFG's exposure to collateralized debt obligations made up of asset-backed securities, particularly several mezzanine-level CDOs, is especially worrisome, Moody's said. Those CDOs reflect a portfolio with a level of risk that is not congruent with a Aaa rating, the agency said.

Moody's also said the downgrade was precipitated by a concern about the uncertainty of the financial commitment from CIFG's parents, Caisse Nationale des Caisses d'Epargne and Banque Federale des Banques Populaires. In December, both banks became shareholders of the holding company, CIFG Holding Ltd., and placed $1.5 billion into the financial guarantor.

Moody's said the downgrade was not the direct result of CIFG's lack of capital, as the rating agency estimates it will have a total capital ratio of 1.12 times, which exceeds the minimum level for Aaa, but falls short of the target by about $500 million. Moody's also said CIFG's insured portfolio will likely suffer lifetime losses of approximately $760 million.

A spokesman for the company said CIFG is committed to working with Moody's to address its concerns.

"CIFG and its shareholders are exploring all of their options while we await the return of normal market conditions to pursue our business development goals," CIFG spokesman Michael Ballinger said. "We will focus on the approach that protects policyholders and enhances shareholder value."

However, the recent credit crunch and losses stemming from exposure to subprime mortgages has also affected the parent banks. On Thursday, the French bank Natixis reported a net loss of $1.4 billion for the fourth quarter of 2007. Together, CIFG's parent banks own more than two thirds of Natixis, which was created from the merger of their respective investment banking units.

Moody's also said CIFG's relatively recent entrance into the municipal market and recent troubles may hinder its profitability for the foreseeable future. CIFG was established in 2001 and holds licenses in most other states, but has yet to gain a firm foothold in the industry, Moody's said.

Standard & Poor's recently affirmed CIFG's AAA rating, and kept it on negative outlook. Fitch Ratings placed the company on negative watch, with a AAA rating, on Feb. 5.

The CIFG downgrade comes a day after Ambac announced a plan to raise $1.5 billion. While Ambac, and fellow bond insurer MBIA Insurance Corp. have benefitted from efforts by regulators and politicians to support the bond insurers, market sources said CIFG may be allowed to fail because of its relatively small footprint.

"They aren't one of the bigger players so the market isn't as concerned," said T.J. Marta, fixed-income strategist at RBC Capital Markets. "It almost seems like there is this tacit agreement that the little guys are going to be allowed to hang while the big guys are not."

CIFG joins XL Capital Assurance Inc. and Financial Guaranty Insurance Co. as the three previously triple-A rated bond insurers that have now been downgraded by Moody's.

Also yesterday, MBIA Inc., parent of the financial guarantor, said it would cut 48 jobs as part of its previously announced realignment plan. The jobs will all come from the insurance business, though some will be redeployed throughout the company's units, such as asset management, the company said.

Simultaneously, MBIA said it will hire 25 to 30 people to fill strategic roles.

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