Standard & Poor's yesterday announced it had assigned MBIA Insurance Corp.'s AA rating with a negative outlook to credits that MBIA now backs as part of a recent reinsurance deal with Financial Guaranty Insurance Co., which is rated BB on negative watch.

The action does not apply to any variable-rate transactions, "which are under review to determine the impact of the dual ratings," Standard & Poor's said. MBIA earlier this month closed on the transaction, in which it will reinsure $166 billion of FGIC's U.S. public finance book in return for upfront unearned premiums of $639 million.

Bondholders can go to either MBIA or FGIC with claims as part of the unique form of cut-through reinsurance in the deal.

"The assignment of MBIA's rating is based on the cut-through provisions of the reinsurance agreement," Standard & Poor's credit analyst David Veno said in a statement.

MBIA expects it will benefit from the deal as premiums are earned over time. FGIC will free up capital which it can now use to commute other contracts.

The New York Insurance Department said FGIC likely would have been insolvent without the deal.

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