Fitch May Downgrade Bond Insurers After New Test (Update2)

By Christine Richard


Nov. 5 (Bloomberg) -- Fitch Ratings may lower the AAA credit ratings on one or more bond insurers after a new review of the companies' capital takes into account downgrades of collateralized debt obligations that they guarantee.

Fitch said it will spend the next six weeks reviewing the capital of insurers including MBIA Inc., Ambac Financial Group Inc., CIFG Guaranty and Financial Guaranty Insurance Co. to ensure they have enough capital to warrant an AAA rating. Any guarantor that fails the new test may be downgraded within a month unless the company is able to raise more capital, New York- based Fitch said today in a statement.

CIFG and FGIC, the bond insurer whose owners include Blackstone Group LP, have the highest probability of suffering erosion in the capital because of the falling value of CDOs, Fitch said. Ambac has a ``moderate probability'' and MBIA is at ``low'' risk, Fitch said.

``It's safe to say our expectations have taken a turn for the worse,'' said Thomas Abruzzo, an analyst with Fitch in New York. ``What we thought was hypothetical based on analysis done in the summer has become the base case.''

CDO Downgrades

In September, Fitch announced the results of a stress test of the bond insurers' capital to demonstrate how much capital insurers would need if conditions in the market were to significantly worsen. The test indicated that FGIC and CIFG would need to raise additional capital under the hypothetical scenario.

Fitch said it decided to review the bond insurers after ``broader and deeper'' downgrades of CDOs, which package debt such as subprime mortgage securities and loans.

The bond insurance industry has guaranteed more than $1 trillion of bonds issued by U.S. cities and states as well as bonds backed by mortgages, credit cards and other assets, and the guarantee allows borrowers to use the insurers' AAA rating. Shares and debt of the insurers has tumbled on concern the sliding value of subprime mortgages may erode their credit ratings.

Merrill, Citigroup

Merrill Lynch & Co. last month doubled the size of its anticipated writedowns on subprime debt to more than $8 billion and Citigroup Inc. yesterday said it may reduce the value of its holdings by $11 billion.

Buyers of bond insurers' credit default swaps are betting the credit ratings will be lowered.

Credit-default swaps linked to MBIA, the world's biggest bond insurer, rose 41 basis points to 521 basis points, according to CMA Datavision in New York. Contracts linked to Ambac, the second-largest, climbed 29 basis points to 718 basis points, CMA prices show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

``Fitch recognizes that financial guarantors view maintenance of their 'AAA' ratings as a core part of their business strategies, and management teams will take any reasonable actions to avoid a downgrade,'' the statement said. ``However, Fitch also recognizes that recent capital markets volatility, including sharp declines in the share prices of the publicly traded financial guarantors, may make capital raising efforts difficult unless market conditions improve.''

Standard & Poor's said in a report released last week that it was reviewing how recent downgrades of subprime mortgage- backed securities and CDOs might affect the capital position of bond insurers. In August, Standard & Poor's said after running its ``worst case'' scenario for the subprime mortgage market that all of the insurers had sufficient capital to keep their ratings.