S&P Will Review Bond Insurers With New Assumptions (Update2)

By Christine Richard


Jan. 16 (Bloomberg) -- Standard & Poor's will start a new examination of bond insurers, one month after affirming the companies' AAA ratings, because losses on subprime mortgages will worse than the firm anticipated.

The ratings company will examine whether insurers including MBIA Inc. and Ambac Financial Group Inc. have enough capital to withstand reductions in the ratings of the mortgage-backed securities they guarantee. The credit test will be completed within a week, said Mimi Barker, a spokeswoman in New York.

S&P is now assuming losses on 2006 subprime mortgages will reach 19 percent, up from 14 percent, as housing prices decline further than previously thought. That may make S&P more likely to downgrade the companies along with the mortgage-backed securities they guarantee, threatening the viability of the bond insurance business itself. Issuers buy insurance for the sole reason of attaching the AAA rating to their debt.

``The rating agencies have lost as much credibility as the bond insurers,'' said Richard Larkin, a municipal bond analyst with JB Hanauer & Co. in Parsippany, New Jersey. ``Every time you turn around they're changing their minds about what's going to happen in the subprime mortgage market.''

After completing a test of the financial guarantors on Dec. 19, S&P put the AAA ratings of MBIA, Ambac, Security Capital Assurance Ltd. and CIFG Financial Guaranty on negative outlook. The firm placed FGIC Corp.'s AAA rating under review for a possible downgrade.

19 Percent Losses

The new loan-loss assumptions ``reflect the growing economic consensus that U.S. home price declines will be larger than previously forecasted and that the slump in the U.S. housing market is expected to last far longer than previously anticipated,'' S&P said yesterday.

Late last year the three major credit rating companies said they were reexamining the capital levels of bond insurers after widespread downgrades of securities backed by subprime mortgages. The reviews triggered efforts by the bond insurers to raise capital.

Earlier today Ambac announced plans to sell $1 billion in equity and equity-linked notes and said it was cutting its dividend by 67 percent. Fitch Ratings had given the company until the end of the month to raise $1 billion to avoid a cut of its insurance rating to AA+.

Fitch also affirmed MBIA's AAA rating, citing its completion of a $1 billion surplus note sale last week. The notes priced at a yield of 14 percent. Over the long term, MBIA and the rest of the industry will still have to address additional losses related to subprime-mortgage securities and a drop in new business, Fitch said.