Bloomberg reports that Security Capital is the first top-rated bond insurer to be put on watch for a possible downgrade. Note that Fitch says that Security Capital needs an additional $2 billion in equity to retain its AAA. Given that industry leader MBIA just secured $1 billion from Warburg Pincus, and many were surprised at that move, the notion of a smaller insurer raising $2 billion would seem an insurmountable task.
Note that Bloomberg refers to XL which is a reinsurer that has 47% stake in Security Capital.
Security Capital Assurance Ltd. may lose its AAA credit rating at Fitch Ratings, the first top-rated bond insurer put on notice since the industry came under scrutiny last month.
Security Capital plunged 22 percent in New York Stock Exchange composite trading after the top ranking of its XL Capital Assurance unit was placed on “rating watch negative” by Fitch today.
The company’s capital is at least $2 billion below what it needs to retain the AAA, Fitch said. SCA has four to six weeks to come up with “firm capital commitments” to meet the guidelines, or the rating will fall two levels to AA, Fitch said.
“It’s simply the amount of capital needed to support their AAA ratings,” Thomas Abruzzo, an analyst with Fitch Ratings in New York, said on a conference call with investors. “The actions we’re taking are clearly proactive. It’s not our intention to take actions today and take more actions down the road.”
Security Capital is among seven AAA rated bond insurers that have been probed by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings for the past month after declines in the credit quality of the securities they guarantee. A loss of its top ranking would wipe out XL’s main business of using its AAA rating to guarantee $154.2 billion of debt….
Of the securities XL insures, 38 percent are municipal bonds, 46 percent are structured finance securities and 16 percent are international transactions….
Fitch focused its examination on $16.1 billion of CDOs backed by subprime mortgages. Most of those transactions were underwritten in 2006 and 2007, years that are showing the most credit deterioration, Fitch said today.
“The announcement on SCA reflects sharp downgrades on a number of structured finance CDOs insured by the company,” Abruzzo said.
All of the CDOs that SCA insured were rated AAA at the time the company agreed to back them, and some have fallen to below investment grade in recent weeks, Abruzzo said. Fitch went through every CDO guaranteed by Security Capital before placing the debt on a formal review, Abruzzo said.
“We had to literally go through deal by deal and quite frankly that takes time,” he said. “Our CDO analysts have been working around the clock to support the effort.”