Wednesday, December 19, 2007

Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC

Dec. 19 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, had the outlook on their AAA credit ratings lowered to negative from stable by Standard & Poor's, while ACA Capital Holdings Inc.'s guaranty ranking was cut to CCC from A.
S&P also reduced its outlook for Financial Guaranty Insurance Co. and XL Capital Assurance Inc. to negative. The actions were ``prompted by worsening expectations'' for insured nonprime residential mortgage bonds and collateralized debt obligations of asset-backed securities, New York-based S&P said in a statement.

``The hits keep coming,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``It's been our view that these guys are in a much more difficult predicament than investors or the companies themselves believed.''

Industrywide downgrades would lead to losses of as much as $200 billion on securities being insured as some holders would be forced to sell their bonds in a depressed market because of their investment guidelines, according to data compiled by Bloomberg. A downgrade would also stifle the guaranty businesses that make up the majority of revenue at MBIA and Ambac.

MBIA and Ambac lost more than half their stock market value this year on concerns they may lose their top ratings because they have insured securities linked to failing subprime mortgages. The companies reported combined losses of $2.9 billion in the third quarter after writing down the value of some debt they guarantee.

Ambac fell $1.78, or 6.6 percent, to $25.20 at 12:12 p.m. in New York Stock exchange trading. MBIA dropped 9.6 percent to 25.04.

ACA Capital

ACA Capital is required to post collateral of about $1.7 billion if its credit rating falls below A-, management said during a Nov. 9 conference call. The rating was cut 12 levels today. The New York-based company said Nov. 19 it wouldn't be able to post that much or make termination payments on the contracts.

Bear Stearns Cos. and Merrill Lynch & Co. are among several major banks in talks to bail out ACA, the New York Times reported today, citing two people familiar with the situation.

ACA Capital rose 24 cents to 55 cents in over-the-counter trading. The shares, suspended by the New York Stock Exchange this week for breaching capitalization requirements, had plunged 98 percent this year.

ACA Capital as of June 30 had sold protection to 31 counterparties through credit-default swaps on $61 billion of highly rated securities, including CDOs backed by subprime mortgage securities, according to filings. CDOs are created by packaging debt or derivatives into new bonds with varying ratings.

The swap agreements effectively transferred the risk of having to report mark-to-market losses on the debt from banks and other holders of the securities to the bond insurers.

Losses Grow

Merrill Lynch may have used contracts with ACA Capital to pass off the market risk of $5 billion in CDOs, Roger Freeman, an analyst covering the brokerage industry for Lehman Brothers Holdings Inc., wrote in a Nov. 5 report. If ACA Capital defaults on its swap contracts, Merrill Lynch could recognize unrealized losses on those securities of about $3 billion, Freeman wrote.
For more than 20 years, the safety of bond insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. The bond insurers promise to make interest and principal payments as they come due on securities if the issuer falters.

The collapse of the U.S. subprime mortgage market has led to about $76 billion of losses at securities firms and banks this year. Subprime loans are made to people with poor credit.

Ambac, the second-biggest bond insurer, guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds, while FGIC Corp., parent of Financial Guaranty Insurance Co., insured $314 billion.

On Notice

The bond insurers are paying a price for expanding beyond municipal bonds to guaranteeing debt backed by subprime mortgages and home equity lines of credit as well as CDOs that contain asset-backed debt.

Record defaults on the subprime debt contained in the bonds sparked losses that have spread throughout the credit markets, forcing the writedowns by banks.

Moody's, Fitch and S&P, criticized throughout the credit slump for giving excessively high ratings to asset-backed debt, took a second look at the bond insurers in the past few weeks after sweeping downgrades of CDOs. The companies had issued reports as recently as October that said the insurers were unlikely to face capital constraints because of the subprime mortgage crisis.

Though the rating companies have stopped short of formally reviewing bond insurers for possible downgrades, they put companies on notice that they may need to raise capital to keep their ratings.

Fitch started a new review Nov. 5 and said it may downgrade one or more insurers after a six-week review. The ratings companies said they may need several weeks to determine which insurers may need more capital as a cushion to justify their AAA ratings. Moody's began its new study Nov. 8 and S&P followed on Nov. 26.

No comments: