Security Capital Assurance Ltd., hobbled by deterioration in its financial guarantee portfolio, lost its AAA bond insurer grade at Fitch Ratings, throwing the rankings of at least $154.2 billion of securities in doubt.
Fitch cut its rating five levels to A on Hamilton, Bermuda- based SCA's XL Capital Assurance and XL Financial Assurance. The units, which guarantee municipal and corporate bonds, were given four to six weeks on Dec. 21 by Fitch to raise about $2 billion of capital or lose their top ratings. Moody's Investors Service and Standard & Poor's are also reassessing their rankings.
The downgrade is the second of a AAA rated bond insurer by Fitch, which on Jan. 18 lowered its rating on Ambac Financial Group Inc. (ABKFQ:US)'s bond insurance business two levels to AA. Both Ambac and SCA said they abandoned plans to raise new equity capital.
``The downgrades follow Security Capital's announcement yesterday that it has determined not to raise new capital at the present time due to current market conditions,'' Fitch said in a statement today.
The loss of the AAA stamp jeopardizes ratings on securities the SCA units insured, including 3,375 bonds issued by municipalities from New York to Bismarck, North Dakota. The downgrade may limit SCA's ability to generate new business.
About 38 percent of XL Capital Assurance's guarantees are municipal bonds, 46 percent are structured finance securities and 16 percent are international transactions. The unit guaranteed $16.1 billion of collateralized debt obligations backed by subprime mortgages which were performing worse than expected.
SCA fell 72 cents, or 19 percent, to $3.07 at 10:50 a.m. in New York Stock Exchange trading. The shares (SCA:US) rose above $33 in May.
SCA, along with MBIA Inc. (MBI:US), Ambac and FGIC Corp. are paying a price for expanding beyond their traditional municipal-bond businesses to guaranteeing debt linked to riskier subprime mortgages and home-equity loans. The once unquestioned strength of the bond insurers is being reassessed by Fitch, Moody's and S&P because the companies may not have enough capital to cover losses stemming from downgrades on securities they guarantee.
SCA said it will seek to lower its capital needs through reinsurance. Reinsurers assume premiums and risks of insurance companies, reducing the amount of capital an insurer needs in reserve to pay claims.
``The unprecedented uncertainty and instability affecting our industry make it impractical to consider raising new capital at the present time,'' SCA said yesterday in a statement.
CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities, have accounted for the biggest portion of the $133 billion in writedowns and credit losses in 2007 and 2008 at the world's biggest banks including Citigroup Inc. (C:US) and Merrill Lynch & Co. Rising delinquencies on subprime home loans contributed to downgrades on 2,007 CDOs in November alone, according to Morgan Stanley.
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