Financial Guaranty Insurance Co., one of the market's four large bond insurers, was downgraded yesterday to A3 from Aaa by Moody's Investors Service, reflecting the rating agency's lingering doubts about FGIC's ability to raise capital and put forth a viable strategic plan.

The rating remains on review for possible downgrade.

"We assessed our position on both our view on [FGIC's] capital adequacy as well as any capital remediation plan and the outcome was to downgrade the triple-A [insurance financial strength rating] to A3 and keep the rating under review for posssible downgrade, reflecting continued uncertainty around capital planning as well as business strategy and competitive position for the company on a go-forward basis," said Moody's senior vice president Arlene Isaacs-Lowe.

FGIC is the second triple-A rated bond insurer to suffer a downgrade at Moody's hands. It downgraded Security Capital Assurance's financial guarantor, XL Capital Assurance Inc., to A3 with a negative outlook on Feb. 7. Ambac Assurance Corp. and MBIA Insurance Corp. are also on review for possible downgrade.

Moody's said MBIA and Ambac appear to be better positioned than FGIC or XL, and that the reviews of MBIA and Ambac will conclude in the next few weeks.

"Relatively speaking we think MBIA and Ambac are better positioned," said Jack Dorer, Moody's managing director. "We are continuing with our review process and will communicate with the market when we're at a point when we are able."

Moody's put FGIC on review in December, due to the volatility among the bond insurer's exposure to mortgage related risk, contained in the collateralized debt obligations backed by subprime residential mortgages the company guarantees.

"Since that time we have been refining our assessment of cumulative losses on the portfolio at a Aaa level and also evaluating to what extent any capital remediation plans the company might have been pursuing," Isaacs-Lowe said.

The company - privately owned by Blackstone Group LP, Cypress Group, CIVC Partners LP, and PMI Group Inc. - has not announced any plans for adding more capital, though a group of banks has met to discuss a potential bailout of FGIC.

If the company does not soon announce a plan to boost capital, its financial strength rating could be further downgraded to the Baa level, Moody's said.

FGIC has already been downgraded to double-A by both Standard & Poor's and Fitch Ratings. The financial guarantor was unavailable to comment at press time.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.