CIFG Guaranty yesterday was downgraded to A-plus from AAA by Standard & Poor's, marking the third downgrade for the beleaguered bond insurer in the last week. The outlook remains negative.
The rating change came as municipal market officials, including issuers, insurers, and rating agencies, appeared before the House Financial Services Committee hearing in which chairman Barney Frank, D-Mass., and other members of Congress referred to raters and insurers as holding issuers hostage in order for issuers to obtain market access.
Standard & Poor's downgrade reflects a slowdown in CIFG's writing of new policies, turnover of senior staff members, and other rating agency downgrades which are expected to seriously curtail the ability to write new business and grow within the market, Standard & Poor's said.
"CIFG has lagged the industry in terms of par volume in recent years and, in our view, has not developed a strong franchise," Standard & Poor's said in its release. "Because of this, and given our view that total insured business volume will be off for the industry in 2008, we believe that the company is more prone to damage to its franchise than the more well-established financial guarantors."
Both Moody's Investors Service and Fitch Ratings have had similar concerns about CIFG, leading to their downgrades. On March 6, Moody's downgraded the financial guarantor to A1 from Aaa with a stable outlook. A day later, Fitch downgraded CIFG to AA-minus from AAA and kept a negative watch.
CIFG will continue to work with Standard & Poor's and the other credit agencies to bring its ratings back to triple-A, though John Pizzarelli, chief executive officer of CIFG, said in a statement that it remains difficult because of the agencies' changing methodologies and capital requirements. Despite this, he said CIFG will continue to examine potential solutions.
"We are committed to maintaining CIFG as an ongoing concern and are exploring all of our options that protect our policyholders, enhance shareholder value, and build CIFG's franchise," Pizzarelli said.
The bond insurer's parent, CIFG Holding Ltd., on Monday addressed the turnover mentioned by Standard & Poor's, naming Richard Price as non-executive chairman to work on developing business strategy and strengthening the franchise.
The rating agencies have challenged the commitment of Banque Populaire Group and Caisse d'Epargne Group, the French two banks that serve as the controlling shareholders. In December, the banks injected $1.5 billion capital into CIFG, essentially transferring control from Natixis, an investment bank more than two-thirds owned by the banks. At the same time Pizzarelli was named CEO.
Both moves were intended to solidify CIFG's triple-A rating, but since then concerns have surfaced about the banks' long-term commitment. The parent banks have suffered from the current credit crunch affecting global markets, and in early March, Natixis reported a net loss of $1.4 billion for the fourth quarter of 2007. The rating agencies worry that as the banks need more capital in other parts of their businesses, they may be reluctant to contribute more to CIFG Guaranty.
In 2007, CIFG ranked sixth among the nine bond insurers, with 353 issues insured for a total value of $4.7 billion. In 2008 to date, CIFG has written $38.1 million in policies on seven deals, for 0.3% of the market, according to data from Thomson Financial.
CIFG, one of the more recent bond insurers to enter the market, was established in 2001 and holds licenses in most states.
In other bond insurance news, MBIA Inc. director Debra Perry will step down from the board to assist the company in redefining and implementing its risk strategy, the company said. Perry's work on the risk profile of MBIA, the parent of monoline bond insurer MBIA Insurance Corp., will fall within the company's five-year restructuring plan.
Perry brings to the task more than a decade of work as the chief credit officer at Moody's between 1992 and 2004. Prior to that she served in various functions in the fixed-income research department of First Boston Corp.
The news came against the backdrop of the congressional hearing aimed at addressing the current turmoil in the municipal market. New York insurance superintendent Eric Dinallo spoke about his office's efforts over the last several months to deliver additional capital to the bond insurers, including MBIA and Ambac Assurance Corp.
Regulators are working to solve the capital shortcomings of Financial Guaranty Insurance Co., though it is possible the insurer may not return to triple-A strength, Dinallo said in an interview on CNBC yesterday morning. However, he has seldom mentioned the smaller bond insurers like CIFG.
Last week, when CIFG was first downgraded by Moody's, market sources said CIFG would likely receive limited help from insurance regulators. However, it is unclear whether that is related to the size of banks' exposure to CIFG or if it is because a downgrade of the financial guarantor affects fewer municipalities on account of its smaller percentage of written policies.
"Every single bond insurer is in a different situation with different strengths and weaknesses," Dinallo said in testimony yesterday.
A spokesman in Dinallo's office declined to elaborate. In his testimony, Dinallo went on to say that restoring confidence in the bond insurers' ratings is not likely to solve all of the current problems in the market.
