Fitch Ratings said yesterday that based on its subprime mortgage holdings, it was putting the ratings of Security Capital Assurance Ltd. on rating watch negative with its subsidiaries
XL Capital hold 46.1 percent of SCA .
Bear, Stearns & Company Inc. said the Fitch finding that SCA needs to come up with $2 billion in additional capital means difficult choices for XL management and not much upside for investors.
Bear Stearns said XL can decide not to put further capital behind SCA, but the investment firm said it suspects without XL taking part, it could be more difficult for SCA to raise new capital.
Bear Stearns said new investors in SCA may question why XL–a 46 percent owner, and former parent company of SCA–is not putting up additional capital.
If XL did take part in new capital raising, Bear Stearns said it suspects it is unlikely for XL to do the entire capital raising as rating agencies may view a greater than 50 percent stake unfavorably.
Either option is likely to create uncertainty and could lead investors to question how XL ended up in a situation where they have to make a decision when they are backed into a corner, Bear Stearns said.
Fitch said it would expect to affirm SCA's ratings with a stable rating outlook if within the next four-to-six weeks SCA is able to obtain firm capital commitments, and/or put in place reinsurance or other risk mitigation measures in order to meet capital guidelines.
If SCA is unable to come up with the capital guidelines Fitch said it would expect to downgrade SCA's ratings.
Based on the result of its updated capital analysis, Fitch said it would expect the IFS rating to be downgraded to the 'AA' rating category, assuming little change to the company's current capital position.
Fitch added that it understands that SCA is actively working to address its current capital shortfall.
Fitch said its action follows completion of an updated assessment of SCA's exposure to structured finance collateralized debt obligations (SF CDOs) backed by subprime mortgage collateral, as well as SCA's exposure to residential mortgage-backed securities (RMBS).
The rating firm said that SCA's capital adequacy under Fitch's Matrix financial guaranty capital model currently falls below guidelines for a 'AAA' IFS rating by more than $2 billion, due to sharp downgrades by Fitch in a number of SCA's.
Fitch said it began conducting a review of all 'AAA' rated financial guarantors' exposures to subprime-exposed insured transactions on Nov. 5.
Fitch said its review has mainly centered on SCA's exposure to SF CDOs, which totaled almost $16.1 billion as of Sept. 30.
It said the majority of these transactions have been underwritten in 2006 and 2007, and are backed by collateral of the vintages that have been most exposed to material credit deterioration.
The firm noted that SCA, like its other 'AAA' competitors, maintains "excellent liquidity" and to the extent future claims occur in SCA's SF CDO portfolio these payments will often not need to be paid for many years into the future.
Companies affected by the Fitch action were:
o XL Capital Assurance Inc.; XL Capital Assurance (U.K.) Ltd.; XL Financial Assurance Ltd. (all Insurer Financial Strength 'AAA'.)
o Security Capital Assurance Ltd. (Long-term issuer rating 'AA'; Fixed/floating series A perpetual non-cumulative preference shares 'AA-'.
o Twin Reefs Pass-Through Trust (Pass-through trust securities 'AA'.)
This article updated and corrected Dec. 14, 12:20 p.m.
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