The impact on financial guaranty insurance companies fromsubprime residential mortgage backed securities (RMBS) transactionswill likely be minimal according to Moody's Investors Service.

Moody's in a recent report reviewed the guarantors' riskexposure to RMBS and asset backed securities (ABS) collateralizeddebt obligations (CDOs) that contain subprime exposure.

The firm concluded that:

o The risks presented by the direct insurance of subprime RMBStransactions should be contained because the credit enhancementlevels (that is, the cumulative losses assumed by third partiesbefore the guarantors have to pay claims) are generally well inexcess of Moody's current estimates of the ultimate cumulativelosses these transactions may suffer.

o Examining claims on insured ABS CDOs, Moody's found that mostof the guarantors would experience zero expected claims on theirinsured ABS CDOs, in the base case--at 10 percent averagecumulative losses--and none would incur material claims.

However, Moody's warned that further deterioration in the U.S.subprime residential mortgage market--up to 14 percent cumulativesubprime losses on average--could have significantly different neteffects on individual guarantors, given their unique risk andfranchise profiles.

Under the more stressful scenario, Moody's said, guarantors withsizable ABS CDO exposure such as MBIA Inc., which Moody's ratesAaa, would remain adequately capitalized for its rating,

But AMBAC Financial Group, Financial Guaranty Insurance Company,Security Capital Assurance and CIFG Holding financial guarantycompanies and CDCIXIS financial guaranty holdings would all need toundertake capital strengthening measures to maintain their Aaaratings, Moody's said.

FSA (Aaa), Assured (Aaa) and Radian Asset (Aa3) have not insuredmeaningful volumes of ABS CDOs in recent years, Moody's noted.

Stanislas Rouyer, a senior vice president and author of thereport, emphasized that Moody's stress model results are highlysensitive to the underlying inputs, some of which are based onbroad assumptions about specific CDO debt collateral compositionand performance.

Moody's Managing Director Jack Dorer said the firm "willcontinue to refine our ABS CDO analysis while monitoring the impactof any changes to subprime cumulative loss expectations, as well asany underlying rating actions, should they occur, on the creditprofile of the guarantors."

The rating agency said it believes that because ratings are soimportant to the industry's value proposition, a highly ratedfinancial-guarantor with a strong ongoing franchise would likelytake whatever action is feasible to preserve its rating duringtimes of stress.

"Beyond the immediate disruption to the guarantors' businessopportunities due to chaotic conditions within the global creditmarkets," Mr. Dorer said, "these events are likely to be a positivecatalyst for financial guarantor business growth over the mediumterm, as credit re-prices to levels that increase demand for theircore product."

The report is titled "Financial Guarantors' Subprime Risks: FromRMBS to ABS CDOs."