Bloomberg News

U.S. Company Debt Risk Rises After S&P Cuts Bond Insurer FGIC

January 31, 2008

The risk of U.S. companies defaulting on their debt rose after Standard & Poor's cut the top ratings of bond insurer Financial Guaranty Insurance Co. and said it may reduce those for the insurance unit of larger rival MBIA Inc. (MBI:US)

Contracts on the Markit CDX North America Investment-Grade Index of 125 companies climbed 1 basis point to 108.5 basis points, according to Deutsche Bank AG in New York. The index, which rises as investor confidence erodes, earlier fell to 105.5 after MBIA Chief Executive Officer Gary Dunton told investors on a conference call that the biggest bond insurer has more than enough capital to keep its AAA credit ratings. He dismissed speculation it may go bankrupt.

S&P, which cut FGIC to AA from AAA, became the second ratings firm to strip the New York-based insurer of its top ratings. Bond insurers are losing, or are at risk of losing, the AAA ratings they stamped on $2.4 trillion in securities because of potential losses from securities linked to subprime home loans, those made to people with weak credit.

``All of the bond insurers are facing pretty severe downgrade pressure,'' Matt Fabian, a managing director at Concord, Massachusetts-based consulting firm Municipal Market Advisors, said in an interview on Bloomberg Television today. ``If it doesn't happen now, it may happen in three months or six months. You have to expect that for your portfolio.''

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

High-Yield Market

The CDX index had its biggest monthly increase since July as concerns that the bond insurers will be downgraded were coupled with growing expectations that the U.S. economy may enter a recession. The CDX index climbed 31 basis points in January, Deutsche Bank prices show.

The Markit LCDX index, a gauge of confidence in the U.S. high-yield, high-risk loan market that falls as sentiment worsens, dropped 0.25 point to 93.05, according to Goldman Sachs Group Inc.

MBIA, based in Armonk, New York, said it lost $3.4 billion marking down the value of residential and commercial mortgages as well as CDOs it guarantees. CDOs are created by packaging assets including bonds, loans or credit-default swaps and using their income to pay investors. The securities are divided into different portions of varying risk, offering a range of returns.

`Fear Mongering'

MBIA's Dunton blamed ``fear mongering'' and ``distortion'' for driving the company's stock down more than 80 percent in the past year. MBIA is in the best position among its peers to survive the losses and downgrades on securities the industry guaranteed, he said.

Credit-default swaps tied to MBIA's bonds fell to 17.5 percent upfront and 5 percent a year, from 18 percent upfront and 5 percent a year yesterday, according to CMA Datavision in New York. That means the cost to protect $10 million of the company's bonds against default for five years dropped to $1.75 million initially and $500,000 a year. Sellers of the contracts demand upfront payments when they see a risk of imminent default.

The upfront payment on FGIC contracts fell to 23.5 percent upfront from 24.5 percent, CMA prices show. Financial Guaranty Insurance, the fourth-largest bond insurer, is a unit of New York-based FGIC Corp.

Bond insurers guarantee $2.4 trillion of debt and are sitting on losses of as much as $41 billion, JPMorgan analysts Chris Flanagan and Kedran Garrison Panageas said in a research report on Jan. 25. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report.

New York-based Ambac, the second-biggest bond insurer, was stripped by Fitch Ratings last week of the top AAA credit ranking it depends on to guarantee $556 billion of bonds.

To contact the reporter on this story: Shannon D. Harrington in New York at

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

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