Industry Watch: Bond Insurers
04 Mar 2008 06:55 AM

Downgrades Possible for Bond Insurers

Bond insurer MBIA Inc. issued $1 billion surplus notes as part of its capital-raising plan to maintain its ratings standing among the three ratings agencies, but the successful close of the private offering, even though rival Ambac Assurance Corporation’s similar attempt to raise $1 billion through the sale of equity failed, may not be enough for MBIA to avoid a ratings downgrade.

Moody’s placed the Aaa insurance financial strength ratings of MBIA Insurance Corporation and its insurance affiliates, the Aa2 ratings of its Surplus Notes, the “Aa3” ratings of the junior obligations of the Insurance Company, and the senior debt of MBIA Inc. on review for possible downgrades, even after rating the same surplus notes “Aa2” just last week. The announcement from Moody's came as a surprise to MBIA, which moved aggressively to shore up its capital base, particularly in light of statements from the other ratings agencies.

Fellow bond insurer Ambac scuttled its short-lived capital enhancement plan to issue $1 billion of equity and equity-linked securities to shore up its capital base. Ambac has decided that its plan is not an attractive option at this time, citing current market conditions. Fitch Ratings had warned in December that Ambac was on watch for a possible downgrade and would need to raise an additional $1 billion in capital to maintain its triple-A rating.

If the two major bond insurers’ credit ratings are downgraded, it would reverberate throughout the fixed income markets by diminishing the value of the insurance on bonds that they have already guaranteed and affect their ability to attract future business from commercial and government entities seeking insurance for their bonds.

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