Moody’s gave its latest take on the financial health of bond guarantors. Interestingly, Moody’s did not find the pending investment of $1 billion into MBIA to be sufficient for the rating agency to reaffirm MBIA’s AAA rating. Was that because they want to see the deal completed, or because, as some commentators have noted, MBIA will likely need $2 to $3 billion in additional capital? However, they did affirm AAA ratings for Ambac and FSA.
Moody’s Investors Service put FGIC Corp. and XL Capital Assurance Inc. on notice that they may have their Aaa credit ratings lowered and said MBIA Inc. still needs to prove it deserves its top ranking as part of a review of the world’s top bond insurers.
While the New York-based ratings company stopped short of stripping the Aaa rankings of each insurer, it said it will review FGIC and XL for a possible downgrade and lowered the outlooks for MBIA, the largest bond insurer, and CIFG Guaranty to “negative,” indicating they may come under further scrutiny for a cut.
The Aaa rankings of Ambac Financial Group Inc., Assured Guaranty Corp., and Financial Security Assurance Inc. were all affirmed. Radian Group Inc.’s insurance unit kept its Aa3 rating.
“We will be focusing on both the effectiveness of the companies’ capital remediation plans and their risk management strategies going forward,” Moody’s managing director Jack Dorer said in a statement yesterday….
New York-based Ambac on Dec. 13 took out insurance on $29 billion in securities it guarantees, transferring the risk to Assured Guaranty. MBIA said this week it will receive a $1 billion investment from private equity firm Warburg Pincus LLC and Groupe Banque Populaire and Groupe Caisse d’Epargne agreed to take control of CIFG from their Natixis SA banking subsidiary and double its capital…..
“While Moody’s believes that the Warburg Pincus investment will address the estimated hard capital shortfall at MBIA, the negative outlook incorporates uncertainty about the performance of the guarantor’s portfolio,” Dorer said in today’s statementillion of losses at securities firms and banks this year. Subprime loans are made to people with poor credit.
Accrued Interest provided some analysis:
MBIA was affirmed, but given a negative outlook. It sounds like as long as the previously announced capital plan is completed, the negative outlook will be removed. Interestingly, MBIA’s current capital is below the Aaa target level, but their captial is adequate under the stressed scenario (albeit just barely)….
AMBAC, which has been my whipping boy only because they provided enough info to do a deep dive, has been affirmed with a stable outlook. Moody’s believes that AMBAC has enough capital even before the recent reinsurance deal with AGO. This is evidence to support my conspiracy theory: that Moody’s tipped off the insurers as to how much capital they’d need….
This is all great news for MBIA and AMBAC, and not unexpected for FGIC and XLCA. But its not the end of the story for any of them. I’m on record that AMBAC will wind up with larger losses than what their capital currently supports. So I think as time passes, AMBAC (and probably MBIA also) will have to raise additional capital. Its possible losses come in slowly, and therefore the required extra capital is small enough in any given year as to not require drastic measures. That seems to be what Moody’s is saying.
Surely this only confirms the belief that MBIA no longer has a AAA claims paying ability. Like the saying goes “If there is a doubt, then there is no doubt”. Maybe Ackman will need to write that large cheque to charity.