Wednesday, December 5, 2007

MBIA Shares Drop After Moody's Says Capital in Doubt (Update5)

By Christine Richard

Dec. 5 (Bloomberg) -- MBIA Inc. fell the most in more than 20 years in New York trading after Moody's Investors Service said the biggest bond insurer is ``somewhat likely'' to face a shortage of capital that threatens its AAA credit rating.

A review of MBIA and six other AAA rated guarantors will be completed within two weeks, Moody's said in a statement today. Moody's revised its assessment from last month that MBIA was unlikely to need more capital after additional scrutiny of the Armonk, New York-based bond insurer's mortgage-backed securities portfolio.

``The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,'' New York-based 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 state, 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 $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.''

Liz James, a spokeswoman for MBIA, said the company had no immediate comment.

Ambac, SCA

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.

MBIA, down 62 percent this year, fell $5.21, or 16 percent, to $27.42 in New York Stock Exchange composite trading, the biggest drop since October 1987. The stock is at a seven-year low. Ambac, based in New York, fell $2.30, or 8.9 percent, to $23.52. Hamilton, Bermuda-based SCA rose 57 cents to $6.67.

Hedge funds such as William Ackman's Pershing Square Capital Management have been betting that the stocks will drop. Ackman has short positions on MBIA and said he stands to make as much as $500 million if the company goes bankrupt, money he will give to charity.

Slide in Quality

Moody's, Fitch and S&P are examining the insurers, known as monolines, on concern that a slide in the credit quality of some of the 80,000 securities they guarantee requires them to hold more capital to justify their AAA ratings.

The insurers wrote contracts on almost $100 billion of collateralized debt obligations backed by subprime-mortgage securities as of June 30, according to Fitch. Those CDOs, which are created by packaging debt or derivatives into new securities with varying ratings, tumbled in value as defaults on subprime mortgages soared.

Moody's said it may downgrade some ratings without placing them on a formal review. The company also plans to take into account any prospective loss of business because of declining investor confidence.

Excess Capital

MBIA had excess capital of about $1.2 billion over what Moody's requires as of Sept. 30, according to company documents.

Raising capital would require the insurers to reinsure bonds they have guaranteed, sell preferred stock, common stock, or even slow down their underwriting, the companies said in presentations last week.

``The company has to address this,'' Haines said. ``They can't simply sit on their position right now. They've got to be cranking up reinsurance. They've got to be changing the risk profile of the new business they write. They've got to be considering some other soft capital kind of arrangements.''

MBIA and Ambac executives last week said they are considering new financing to defend their ratings.

``If any major monoline were to have a rating change it would have a real impact on all of the business of the monolines,'' MBIA Chief Financial Officer Chuck Chaplin told a Bank of America conference in New York on Nov. 27.

$4 Billion

Egan-Jones Ratings Co., a credit researcher, estimates that MBIA will need to raise more than $4 billion, managing director Sean Egan said. That compares with the company's market capitalization of $3.4 billion.

``It's Moody's firing a warning shot saying `you have two weeks, so do something,''' said Paul Berliner, a trader at Schottenfeld Group, which manages $100 million in New York. ``The drama behind MBIA and Ambac should be the most important focus for the entire financial sector right now. Everyone should be on the edge of their seats wondering how this plays out.''

Credit-default swaps tied to MBIA's bonds climbed to the highest in two weeks after the announcement, widening to 480 basis points from 400 basis points earlier today, according to broker Phoenix Partners Group in New York.

The contracts, used to speculate on a company's ability to repay its debt or hedge against the risk it won't, rise as investor confidence falls. A basis point on a contract protecting $10 million in bonds from default for five years is equivalent to $1,000 a year.

Bondholders may lose about $9 billion on municipal bonds if the insurers falter, according to data compiled by Bloomberg and Lehman Brothers Holdings Inc. indexes. More than $30 billion would disappear from the value of CDOs held by banks, based on the values that Citigroup Inc. and Merrill Lynch & Co. assigned to their holdings in the past month. Another $150 billion may evaporate from bonds backed by home-equity lines of credit and other mortgages and loans, according to investors and traders.

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