Moody's Investors Service will not assign MBIA Insurance Corp.'s A2 rating to the approximately $166 billion portion of Financial Guaranty Insurance Co.'s U.S. public finance book that the financial guarantor has agreed to reinsure because the deal does not meet the rating agency's credit substitution standards, Moody's said in a special report earlier this week.

FGIC's ability to terminate the agreement without a final payment being made by MBIA prevents it from meeting Moody's requirements for substitution, Moody's said. FGIC could cancel the deal if MBIA becomes insolvent, falls below investment grade, or for a number of other reasons.

Regulators had hoped the rating agencies would give the FGIC-backed credits MBIA ratings because of a unique form of reinsurance provided. Under the terms of the deal, bondholders can go to either FGIC or MBIA with any claims.

MBIA and FGIC are currently in discussions with Moody's about issues related to the deal, according to the New York Insurance Department.

Standard & Poor's earlier this week said it would it assign MBIA's double-A rating to the bonds it reinsured from FGIC's portfolio, excluding variable-rate transactions, whose ratings Standard & Poor's will further review. FGIC is rated B1 on review for downgrade by Moody's and BB on negative watch by Standard & Poor's. Fitch Ratings has withdrawn its rating on FGIC.

The reinsurance deal could have minimal impact on the value of bonds insured by FGIC. Although poorly rated and unrated bonds may receive a slight benefit from MBIA reinsurance, most investors are looking past insurance to the underlying ratings of credits, said Evan Rourke, portfolio manager at MD Sass.

"The incremental benefit seems fairly low in terms of how I would approach valuing a bond with an MBIA wrap," Rourke said. "And [Moody's] didn't give it the MBIA rating. But even if they did give it the MBIA rating, confidence remains low."

MBIA expects to benefit from the deal as it earns the premiums over the terms of the policies. It brought in upfront unearned premiums of approximately $639 million as part of the deal.

FGIC will release contingency reserves and receive a ceding premium, which it could use to commute other transactions and reduce its exposures. When it first announced the MBIA reinsurance transaction in August, FGIC also said FGIC UK Ltd. paid French bank Calyon $200 million to commute $1.875 billion of its exposure to collateralized debt obligations of asset-backed securities.

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