Bloomberg News

Moody's May Downgrade Bond Insurers After Review of Subprime

November 08, 2007

Moody's Investors Service said it may lower the AAA credit ratings of some bond insurers after it completes a review of the effect of rising defaults on subprime mortgage securities on the companies' level of capital.

Moody's said in a statement today that it will finish its study by the end of the month and may change the outlook of ratings, place them under review or downgrade the ratings.

CIFG Guaranty, a subsidiary of Natixis (KN), has the highest probability of suffering erosion in its capital because it has guaranteed payment on the largest number of mezzanine collateralized debt obligations, or CDOs, relative to its capital base, Moody's said. CDOs package debt such as subprime mortgage securities and loans. Mezzanine CDOs are backed by securities that all have low investment grade or non-investment grade ratings.

The insurance units of Ambac Financial Group Inc. (ABKFQ:US), Security Capital Assurance Ltd., and Financial Guaranty Insurance Company have ``moderate'' risk of falling below capital adequacy levels, the rating company said.

MBIA Inc. (MBI:US)'s insurance unit is unlikely to fall below capital adequacy benchmarks, Moody's said. Financial Security Assurance Inc., Assured Guaranty and Radian Asset Assurance are ``highly unlikely'' to fall below Moody's benchmarks for their rating categories.

``Companies with sizable exposure to CDOs containing higher- risk mortgage-backed securities are at the greatest risk of developing capital shortfall,'' Moody's said in the report.

The bond insurance industry has guaranteed $2.3 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.

Earlier this week, Fitch Ratings said it was undertaking a similar review of financial guarantors.

To contact the reporter on this story: Christine Richard in New York at

To contact the editor responsible for this story: Emma Moody at

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