The inching towards a downgrade of the monoline insurers continues. As most reader likely know, the so-called monolines provide credit enhancement to various credit products, historically very low risk ones (state and municipal bonds) and in recent years have ventured into more speculative territory.
As we’ve noted before, the rating agencies are faced with a nasty dilemma: downgrade the monolines, which would trigger a downgrade of everything they’ve credit enhanced, which would have colossal knock-on effects, or maintain the ratings in the face of increased investor skepticism. There is only so long the rating agencies can hold the latter stance without further damaging what little credibility they have left. Their hope has been that if they nudge the monolines hard enough without issuing a downgrade, they’ll seek outside capital, obviating or at least forestalling the need for a downgrade.
Bloomberg reports that Moodys has given the monolines a sharp elbow in the ribs today, two weeks before a review is due to be completed on MBIA. Note the story focuses on MBIA even though the “somewhat likely” warning was issued for four monolines:
MBIA Inc. is “somewhat likely” to face a capital shortfall, throwing its AAA credit rating in jeopardy and putting at risk the rankings of the state, municipal and corporate debt it guarantees, Moody’s Investors Service said. The shares tumbled as much as 16 percent.
A review of MBIA, the largest bond insurer, will be completed within two weeks, Moody’s said in a statement today. Moody’s said additional scrutiny of the Armonk, New York-based bond insurer’s mortgage-backed securities portfolio caused it to revise its assessment.
“The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,” Moody’s said. “We now consider this somewhat likely.”
The loss of MBIA’s top ranking would cast doubt over the ratings of $652 billion of municipal and structured finance bonds that the company guarantees. MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody’s, Fitch Ratings and Standard & Poor’s. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of as much as $200 billion, according to Bloomberg data.
“Clearly it’s not a good development for the company,” said Rob Haines, an analyst at CreditSights Inc. in New York. “The agencies have better visibility about the companies and maybe they’ve seen something that’s troubling or it’s just general deterioration in the market.”
Ambac Financial Group Inc., the second-largest bond insurer, Financial Guaranty Insurance Co., the fourth-largest, and Security Capital Assurance Ltd. are also “somewhat likely” to have a capital shortfall, Moody’s said today. CIFG Guaranty, considered the most likely to fall below the benchmark, was bailed out by parents Groupe Banque Populaire and Groupe Caisse d’Epargne.