Moody's Investors Service has downgraded to Caa1, from B2, the insurance financial strength ratings of Syncora Guarantee Inc. ("SG" -- formerly XL Capital Assurance Inc.), and Syncora Guarantee (U.K.) Ltd., with the ratings placed on review with direction uncertain. In the same rating action, Moody's downgraded the provisional senior unsecured shelf rating of Syncora Holdings Ltd. ("Syncora") to (P)Ca from (P)Caa3 and the rating of Twin Reefs Pass-Through Trust ("Twin Reefs") to Ca from Caa2, with the ratings of both issuers placed on review with direction uncertain. Moody's has also downgraded to Caa1, from B2, the insurance financial strength rating of Syncora Guarantee Re Ltd. ("SG Re" -- formerly XL Financial Assurance Ltd), and will withdraw the rating as a result of its recent merger into SG. Prior to today's rating action, the ratings of SG and SG Re were on review for possible upgrade, the ratings of Syncora had a negative outlook and the rating of Twin Reefs was on review with direction uncertain.
According to Moody's, today's rating action reflects both Moody's expectation of higher mortgage-related losses arising from Syncora's insured portfolio, as well as the possibility that ongoing settlement negotiations with CDS counterparties regarding ABS CDO exposures could result in a comprehensive agreement for the termination of troubled exposures. If Syncora is able to reach a favorable settlement, remaining SG policyholders would likely benefit from an improved credit profile at the company. However, Moody's believes that the terms of any such settlement would likely be consistent with a distressed exchange for settling CDS counterparties. For this reason, Moody's has downgraded SG's insurance financial strength rating, with the ratings on review with direction uncertain, to reflect the wide range of potential outcomes resulting from Syncora's restructuring initiatives.
Moody's ratings on securities that are guaranteed or "wrapped" by a financial guarantor are generally maintained at a level equal to the higher of a) the rating of the guarantor (if rated at the investment grade level), or b) the published underlying rating. In accordance with current rating agency policy, following Moody's June 20, 2008 rating action on SG which lowered its rating to below the investment grade level, Moody's withdrew ratings on SG-wrapped securities for which there was no published underlying rating. Should the guarantor's rating subsequently move back into the investment grade range or should the agency subsequently publish the associated underlying rating, Moody's would reinstate previously withdrawn ratings on those wrapped instruments. For further information please see Moody's special comment entitled: Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment Grade (May, 2008).
Regarding Syncora's insured portfolio, Moody's expects further stress on the company's risk-adjusted capital position in light of continued deterioration in housing fundamentals and the related implications on the company's mortgage-related exposures. Higher expected mortgage default rates and severity were reflected in upward revisions to Moody's lifetime loss estimates for certain recent vintage residential mortgage-backed securities announced in September.
Moody's said that its review of SG's insurance financial strength rating will update its assessment of the guarantor's mortgage-related exposures and other insured transactions. Moody's stated that because SG is meaningfully exposed to the risk of US subprime mortgages and other residential mortgage products, its updated mortgage loss assumptions are expected to have a significant impact on estimates of the firm's capital adequacy, which had recently shown signs of improvement following the $1.8 billion settlement with former parent, XL Capital Ltd, and the commutation of certain credit default swaps on ABS CDO exposures with Merrill Lynch.
According to Moody's, the ratings review will also focus on the result of ongoing negotiations with CDS counterparties regarding the commutation of remaining ABS CDO exposures at the company. Moody's notes that Syncora has earmarked $820 million from its settlement with XL Capital Ltd for the purpose of commuting, terminating, amending or restructuring existing
agreements with certain CDS bank counterparties. To the extent Syncora is able to commute these exposures at a reasonable price, SG's insurance financial strength rating would likely be upgraded, but any upward rating revision would likely result in a non-investment grade rating given the continued uncertainty with respect to Syncora's remaining mortgage-related exposures and, in Moody's opinion, impaired franchise.Conversely, Syncora's inability to adequately mitigate the potential for further losses on these contracts through negotiated settlements within a reasonable timeframe could result in a confirmation of the rating or a further downgrade, depending on Moody's view of capital adequacy at the firm at the conclusion of our ratings review.
The downgrades of the ratings on Twin Reefs and Syncora's provisional senior unsecured shelf registration were prompted by the likelihood that future dividend payments on Twin Reefs will be omitted, as well as the absence of unrestricted dividend capacity at SG. Moody's anticipates that any improvement in SG's capital adequacy profile achieved through the commutation or termination of troubled mortgage-related exposures will have only a moderate impact on the credit profile of the holding company over the near to medium term.
LIST OF RATING ACTIONS
The following ratings have been downgraded and placed on review with direction uncertain:
Syncora Guarantee Inc. -- insurance financial strength to Caa1 from B2;
Syncora Guarantee (U.K.) Ltd. -- insurance financial strength to Caa1 from B2;
Syncora Holdings Ltd. -- provisional rating on senior debt to (P)Ca from (P)Caa3;
Twin Reefs Pass-Through Trust -- contingent capital securities to Ca from Caa2.
The following ratings have been placed on review with direction uncertain:
Syncora Holdings Ltd. -- provisional rating on subordinated debt at (P)Ca and preference shares at Ca.
The following rating has been downgraded and will be withdrawn:
Syncora Guarantee Re Ltd -- insurance financial strength to Caa1 from B2.
Syncora Holdings Ltd. (formerly Security Capital Assurance Ltd) is a Bermuda-domiciled holding company whose primary operating subsidiary, Syncora Gurantee Inc. (formerly XL Capital Assurance Inc.) provides credit enhancement and protection products to the public finance and structured finance markets throughout the United States and internationally.
