Yesterday, the two big bond insurers got what they wanted, but the victory now looks Pyrrhic. MBIA and Ambac both asked rating agency Fitch to stop issuing ratings after the rating agency was the first of the major scorekeepers to downgrade them below AAA. Fitch has decided to withdrew ratings, since the monolines are denying them access to nonpublic company information, but its early action has been vindicated by downgrades by Moody’s and Standard & Poor’s.
In a phone interview with Bloomberg today, the Fitch analyst formerly covering MBIA underscored the impact on liquidity of collateral posting requirements in its guaranteed investment contracts triggered by the Moody’s downgrade to A2. Note we had discussed this issue at some length in an earlier post.
From the Wall Street Journal:
Fitch Ratings will withdraw its ratings on MBIA Inc., Ambac Financial Group Inc. and their bond-insurer units following moves by the companies to deny the rating agency access to nonpublic portfolio information…
In issuing its decision, Fitch noted that ratings downgrades by fellow firms Standard & Poor’s and Moody’s Investors Service affect the companies’ business prospects, and the companies’ “reactive strategic and capital management planning creates a volatile credit variable.”
MBIA Inc. faces a “tenuous situation” as the bond insurer seeks to cover payments and collateral calls on $7.4 billion of securities triggered by a credit-rating downgrade, Fitch Ratings analyst Thomas Abruzzo said.
MBIA may need to tap assets pledged to back other commitments as it comes up with the money, potentially opening the company up for further downgrades, said Abruzzo, who yesterday withdrew his rating on MBIA and Ambac Financial Group Inc. after the companies refused to give him information.
MBIA, based in Armonk, New York, is being forced to post collateral and make payments to some investors after Moody’s Investors Service cut its insurance rating five levels to A2 from Aaa last week. Some of that money may come from assets backing an $8.1 billion medium-term note program, potentially creating a new liability for MBIA’s insurance company, Abruzzo said. MBIA may be forced to sell some securities at a loss to fund the collateral payments, he said.
“It exposes the company to event and market risk,” Abruzzo said in a telephone interview. Abruzzo cut MBIA to AA from AAA in April. “It wasn’t something that was envisioned when the company was AAA with a stable outlook.”….
The asset management unit issued guaranteed investment contracts and medium-term notes, which carried AAA ratings because they were backed by the company’s insurance unit, according to company filings. The unit makes a profit by investing in lower-rated securities that have higher yields, filings show. The downgrade of the insurance subsidiary triggered provisions in the investment contracts requiring MBIA to post collateral or repay investors, who include cities and states.
The asset management unit has $15.2 billion “available to satisfy” the demands, the bond insurer said in its statement. Those assets, though, also back the medium-term note program run by MBIA Global Funding LLC, the filings show. Taking $7.4 billion as collateral and cash payments would leave $7.8 billion to back the $8.1 billion program, a gap of $300 million that could widen if assets are sold at a loss, Abruzzo said.
“It’s a concern that the liquidity in the asset management business has been further encumbered,” Abruzzo said. “It’s a bit like robbing Peter to pay Paul. Ultimately, the insurance company is on the hook for any shortfalls.”