Standard & Poor's yesterday moved the AAA financial strength rating of bond insurer Financial Security Assurance Inc. to CreditWatch negative, while three European governments continued to work on plans to strengthen FSA's parent Dexia SA.
The action on FSA follows Tuesday's downgrade of Dexia's core units to A-plus from AA-minus. Last week, the governments of Belgium, France, and Luxembourg - along with institutional investors - helped prop up Dexia with a capital infusion $9.2 billion, and the economy ministers of those countries planned to meet last night to discuss further support, according to news reports.
"We believe ongoing support from Dexia for FSA is less certain in view of its weaker credit profile and recent changes to ownership and senior management," Standard & Poor's credit analyst Robert Green said in a statement. "These changes raise questions as to whether FSA will still be viewed as a strategic investment going forward. FSA's ability to raise capital and access to liquidity are, we believe, very strongly linked and limited to Dexia."
FSA said it believes the rating action reflects the uncertainty about the economy and Dexia's support and not FSA's "fundamental credit strength." FSA said it has "sufficient resources to meet all claim payments in Standard & Poor's current triple-A stress environment."
"FSA benefits from a strong business model, which produces a stable base of future revenues from embedded unearned premiums and investment income, without requiring new business origination activity or access to market funding," said Robert P. Cochran, chairman and chief executive officer.
Standard & Poor's also noted the uncertainty about the level of support Dexia would provide to FSA's financial products unit. Dexia last week converted a $5 billion unsecured credit line it had offered to FSA into a repo facility and said it would inject no more than $500 million of additional capital into the unit to cover economic losses beyond the $316 million of losses recognized at the end of June 2008. FSA said the support "significantly exceeds Standard & Poor's risk-based capital charge for the FP portfolio."
A positive outcome to the review will hinge upon Dexia and its decisions about FSA's future, Standard & Poor's said.
"A favorable resolution to the CreditWatch action on FSA is subject to the positive resolution of Dexia's CreditWatch status as well as favorable clarification of capital and liquidity support and FSA's strategic role within the Dexia group," Standard & Poor's said.
The agency's most recent action won't likely have a large impact on the pricing of FSA-backed bonds, said MD Sass portfolio manager Evan Rourke. Other than bonds wrapped by Berkshire Hathaway Assurance Corp., investors are wary about offering premiums for insured bonds.
"My impression was the market was not conferring any kind of real yield premiums for FSA insurance, so essentially you're sort of washing to the underlying already," Rourke said. "In some ways, I think the market has already priced to the downgrade, so I don't think it will have an immediate effect other than to make already jittery people more jittery."
Standard & Poor's also downgraded the long-term counterparty credit rating of FSA Holdings Ltd. to A-plus from AA-minus. As the intermediary holder of the bond insurance subsidiary, its credit quality is essentially equal to that of Dexia, Standard & Poor's said.
Elsewhere in the bond insurance market, MBIA Inc. confirmed it has laid off a portion of its staff as it continues to deal with fallout from the credit crisis. It would not comment on the size or timing of the staff reduction.
"We have adjusted our staffing levels to reflect current activities and the anticipated realignment of our business to be achieved through MBIA's previously announced transformation goals," Willard Hill, chief marketing and communications officer, said in a statement.
