Moody’s Investors Service upgraded National Public Finance Guarantee Corp., MBIA Inc.’s municipal-only insurer, to Baa1 from Baa2, citing the company’s recent settlements with counterparties in soured mortgage-backed securities deals.
The agency also upgraded MBIA Inc. to Ba3, from Caa1, and subsidiary MBIA Insurance Corporation to B3 from Caa2. All ratings are on positive outlook, which means Moody’s sees positive trends that could translate into further upgrades sometime in the future.
The recoveries for claims paid on the MBS, including settlements of $1.7 billion from Bank of America Corp. and $110 million from Flagstar Bank, have improved the group’s liquidity and reduced the volatility of its insured risk portfolio, Moody’s said in a statement late Tuesday.
“We are pleased with Moody’s ratings actions and view National’s upgrade as one important step toward regaining its leadership position in the public finance bond insurance market,” said Willard Hill, managing director and chief communications officer at MBIA. In addition to resolving litigation problems and achieving adequate ratings, MBIA said recently that National will need to reestablish connections in the marketplace as well as make some additions to its staff before it can start writing new business.
“Any upgrade is a step in the right direction,” said Matt Fabian, a managing director at Municipal Market Advisors. For the company to rebuild its market share, however, “they’re going to need something that at least hints at a double-A rating.”
Moody’s said National could get a higher grade if it establishes a more solid market position, marked by underwriting of high quality risks at attractive prices, or if meaningful improvements at MBIA Corp. are made, either through risk reduction or capital enhancement.
Helen Remeza, vice president and senior analyst in the Moody’s specialty insurance team, said National’s credit profile is linked to MBIA Corp.’s because in the past, there has been intercompany support across the entities within the MBIA group, including a $1.7 billion loan that National made to MBIA Corp. The loan has been fully repaid from cash received in the settlements.
“Going forward, if MBIA Corp.’s financial condition again deteriorates, especially if there are unexpected events related to commercial real estate, the question is, would National again provide intercompany support to its affiliate, MBIA Corp.,” Remeza said.
The repayment of the intercompany loan, which improved National’s credit profile, was part of Moody’s rationale for upgrading its rating, in addition to the termination of its reformation litigation, in which several banks disputed MBIA’s 2009 restructuring.
Moody’s said that National’s claims-paying resources are sufficient to cover expected losses in its insured portfolio, but its business position is weakened by a lack of participation in the market for the last five years.
Stanislas Rouyer, associate managing director in the Moody’s specialty insurance team, said the lack of market penetration is a result of the low interest rate environment, as well as a decline in the perceived value of bond insurance.
“So we’ll see how National is now going to try to position itself to deal with the issues,” Rouyer said. “Clearly, the focus up until recently was on settling the group’s litigation and problems with their insured portfolio, but I think we’re going to see a shift and probably some refinement to their reentry strategy, and that I think will become more transparent over time.”
National received a higher rating earlier this month from Standard & Poor’s, when it was upgraded to A from BBB. MBIA Inc. was upgraded to BBB from B-minus.
Other active bond insurers in the market carry ratings in the double-A category. Assured Guaranty Municipal Corp. is rated AA- by Standard & Poor’s, although it lost its Aa3 rating from Moody’s earlier this year when it was downgraded to A2. Build America Mutual Assurance Corp. carries a AA rating from Standard & Poor’s.
“I think it’s important to note that, with the insurers in particular, rating changes are never final,” said MMA’s Fabian. “And one rating can tend to drive more. So if these ratings help [National] begin to underwrite new business, then it could lead to upgrades rather quickly.”
As a result of Tuesday’s upgrades, securities that are insured by MBIA Corp. or National will also be upgraded, unless the underlying rating of the security is higher than the insured rating.