Moody's Outlook On Financial Guarantors Stable

Moody's said that its ratings outlook for the financial guarantors' industry is stable for the next 12-to-18 months, but "a number of factors continue to create a challenging operating environment for the industry as a whole."

At the same time, Moody's said in its report--"Global Financial Guaranty Insurance Industry Outlook"--that looking beyond the current "challenging operating environment," emerging structural trends affecting the world's financial markets "are likely to provide substantial opportunities for the guarantors over the medium to long term." Financial guarantors underwrite municipal bonds and other credit facilities.

James Eck, vice president and senior analyst, said in a statement, "These opportunities are expected to arise from increased financial disintermediation globally," as well as growing institutional demand for low-risk securities and the pending implementation of Basel II. Basel II is an international agreement on capital adequacy among banking supervisors.

Moody's said it made its judgment that the ratings outlook for the guarantor industry would remain stable over the midterm because the "number of rating actions is likely to be modest and driven more by specific characteristics of individual firms than by industrywide conditions."

The stable outlook is "underpinned" by the fact that the overall capital adequacy of the financial guaranty industry "remains strong," Mr. Eck said.

The industry's problems include tight credit spreads, a record supply of capital seeking returns, the maturity of the U.S. public finance market and the existence of financial guaranty alternatives (including credit default swaps and senior/subordinated structures).

"These are factors that have all combined to test the industry's underwriting discipline," Mr. Eck said, because growth-minded financial guarantors "are looking to notch top-line revenue growth with adequate returns on invested capital."

He notes that some of the newer entrants to the industry operate without the benefit of strong embedded earnings to mitigate the effect of cyclical downturns in pricing.

"This situation could put additional pressure on these companies to write new business at less favorable terms," the analyst said, adding that "the established companies face issues of their own given the greater efforts required to redeploy capital in their core business."