Some analysts and investors — not to mention the bond insurers themselves — are reacting negatively to new bond insurance rating criteria issued by Standard & Poor’s last week.

Critics were taken by surprise when the new criteria included requirements that were not included in a preliminary version.

In January, the rating agency issued a “request for comment” on its proposed rating criteria that allowed market participants to provide feedback. S&P took comments for 60 days and said it would take the feedback into consideration as it finalized its bond insurance rating criteria, which was issued last week.

The criteria include 11 analytic categories, three of which represent significant changes from the preliminary criteria, including changes in leverage parameters, consideration of capital charges, and a largest-obligor test.

In the final criteria, the agency says for a bond insurer to achieve a triple-A rating its leverage cannot exceed 75:1. But during a conference call Wednesday sponsored by the agency to discuss the new criteria, some participants complained that S&P did not state what leverage requirement would be applied for double-A and single-A rated companies.

The new criteria sets higher capital requirements than the agency historically put in place, but in some instances they are not as high as those suggested by the preliminary criteria in January.

In the conference call, Rodney Clark, deputy chair for global insurance criteria, said Standard & Poor’s was criticized for a study of defaults in the Great Depression used in the initial criteria, so the agency devised a new approach that was comparable to what it has in place for collateralized debt obligations.

“High recoveries result in much lower capital charges,” Clark said. “The impact is that for the less-risk categories for public finance exposures, capital charges are lower than what was proposed.”

Critics also zeroed in on changes in the largest obligors test. Under the new criteria the single-risk test has been adjusted to reflect and be more consistent with the largest obligors test within S&P’s CDO Evaluator, and exposure to obligors based on ratings. It evaluates what capital resources bond insurers must have to withstand a default. It also captures concentration risk in the portfolio and will limit the growth exposure to any groups of insurers.

“Rather than try to recalibrate the single-risk test that was proposed, the purpose here is to identify large single risks that impair capital outside of that which our model estimates,” Clark said in the conference call.

While stock prices for Assured Guaranty Ltd. and MBIA Inc. have traded up since release of the final criteria, Assured’s public response has been tepid.

In a statement, Assured said it is currently reviewing the criteria, noting it did not have an opportunity to review it in advance. Assured — rated AA-plus by Standard & Poor’s — along with its municipal bond insurer Assured Guaranty Municipal Corp. is the only active bond insurer in the muni market. Before the financial crisis several triple-A rated monoline insurers competed for muni business but that ended with the collapse of the housing market, which resulted in huge losses for insurers. The industry has been hoping that rating agencies in the future will once again see fit to assign them top credit marks.

But Standard & Poor’s new rating criteria seems to suggest that bond insurers won’t see a triple-A rating anytime soon.

Assured said it was looking closely at the largest obligors test, which was not published in the preliminary criteria. “This test appears to have the effect of significantly reducing our allowed single risk limits and limiting our financial strength rating level,” the company said. “We are in the process of analyzing the test and intend to communicate further once we have had a chance to evaluate it and discuss its implications with S&P.”

Assured declined to provide further elaboration. Clark of S&P said the criteria that was published is final and the agency does not expect to make further changes.

An MBIA spokesman said that it is still evaluating the specific impact the criteria will have on its municipal bond platform National Public Finance Guarantee. But the monoline insurer said “it appears that the final criteria requires somewhat less capital than the proposed criteria.”

A spokesman for Ambac Financial said the new criteria does not affect its operations because it’s not rated by S&P and is not presently writing any new business.

Both MBIA and Ambac have lost their triple-A ratings, and Ambac has filed for Chapter 11 bankruptcy protection.

Piper Jaffray analyst Michael Grasher said the capital charges in the new criteria are “more friendly to the industry” but added that the agency missed the chance to clarify what it will require to achieve a certain rating. “My reaction is this process was supposed to help provide transparency around required capital levels for a particular rating and, clearly, there is nothing here which changes that. So they missed that goal.”

S&P said in the area of capital charges it has streamlined the criteria. “When we went from 90 different sectors and issue types in the old criteria and collapsed it into four groups, some capital charges went up and some went down,” Clark said. He added that the ability to determine capital charges is based on disclosures that a firm puts forward and “we will continue to make that assessment ourselves based on the information we have.”

“We don’t know if this is a go-forward piece of regulation,” Grasher said. “But if it’s going to penalize insurers after they’ve already written business and it’s been on their books for years, it’s like changing the rules of the game and we are very far into the game. So it makes no sense whatever from that standpoint.”

Standard & Poor’s said the criteria applies to all risk that is on a bond insurer’s books, no matter when it was written.

Under the new criteria the agency does not consider unearned premiums. “Unearned premium is cash on the balance sheet, it’s earning a return, it has value to the firm,” Grasher said. “So not to include that makes no sense and not giving it credit is wrong.”

S&P said unearned premium was not included because in more than one instance, “in prior actions by regulators, we have observed the unearned premium alone did not prevent regulators for taking remedial actions. Regulators intervened because of weak statutory capital and large unearned premiums did not prevent that.”

When callers on the conference call pointed out that in those cases where regulatory action was taken, leverage was higher than 75:1. The agency could not cite instances where there was regulatory action when leverage was lower than 75:1.

Manal Mehta, co-founder of hedge fund Branch Hill Capital, owns shares of MBIA and Assured. He said to satisfy S&P’s proposed leverage test would require insurers to raise an inordinate amount of capital, effectively killing triple-A bond insurance. “You can’t write new policies at a triple-A level with a high enough ROE to justify raising that amount of capital,” Mehta said. “As currently capitalized, for example, Assured can survive a dire economic scenario which incorporates 25% unemployment and 20% of U.S. banks failing. How does increasing the amount of capital make any sense?”

Standard & Poor’s said “our expectation is that in order to achieve high investment-grade ratings, companies should survive severe economic scenarios and our model seeks to capture that.”

Mehta said that in the original proposal, “there were crazy capital requirements and then a period for feedback. Then, the final criteria comes out which includes a largest obligors test which never appeared in the initial proposal. And meantime, Assured Guaranty and MBIA have been out there figuring out ways to satisfy Standard & Poor’s requirements under the preliminary proposal, which ends up getting modified at the last minute without comments and feedback.”

S&P said it did not include the largest obligors test in the preliminary criteria because it was already included in the CDO criteria, and didn’t need to be republished in the bond insurance criteria.

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