Bond Insurer Rate Battering Continues

Bond insurers Financial Guaranty Insurance Company and CFIG Guaranty were hit with ratings downgrades yesterday.

Moody's Investors Service in New York said the insurance financial strength ratings of the operating subsidiaries of FGIC Corp. were downgraded from “A3″ to “Baa3.” These include FGIC and FGIC UK Ltd.

Fitch said it was downgrading the insurer financial strength rating of CIFG from “AA” rating watch negative to “A-minus” outlook negative, and they remain under review for possible further downgrade.

Moody's said the downgrades reflect the company's inability to date to raise new capital, an increased likelihood of FGIC breaching minimum regulatory capital requirements, and the effects of its current inability to upstream dividends without prior regulatory approval.

The rating firm noted that FGIC on Friday filed statutory statements indicating that as a result of a loss of $1.5 billion, its statutory capital stood at approximately $260 million, compared to the minimum statutory capital requirement of $65 million.

Standard & Poor's Ratings Services said on March 21 it had put the FGIC “A” rating and the FGIC Corp. holding company rated “BBB” on Credit Watch with negative implications. S&P said it did not like the FGIC plan to split into two firms, with one keeping its less palatable risks.

Moody's said its three-notch downgrade of FGIC's reflects a view that the cushion above the required regulatory minimum may not be sufficient to absorb additional losses associated with FGIC's exposures to mortgage default losses and the recent deterioration of Jefferson County, Alabama bonds, to which FGIC has sizable exposure.

Should FGIC breach the $65 million minimum statutory capital requirement the New York State insurance regulator could take action to assume control of the operating company, said Moody's.

It mentioned that FGIC also announced that, as of Dec. 31, 2007, it had breached regulatory aggregate and single-risk limits, which could cause the New York State Insurance Department to order that the company cease writing new business.

However, Moody's also noted that FGIC has disclosed it has already voluntarily stopped writing new business in an attempt to improve its capital position through portfolio amortization.

According to Moody's, the downgrade of FGIC's contingent capital securities–Grand Central Trusts I-IV–to “B2″ reflects the increased possibility that the payment of preferred dividends might not be permitted by the regulator should FGIC decide to exercise its option to put non-cumulative preferred stock to the trusts.

Moody's added that the downgrade of FGIC Corp.'s senior unsecured debt to “B3″ reflects the operating company's inability, without regulatory approval, to upstream dividends to the holding company to service debt, coupled with the structural subordination of holding company senior bonds to operating company preferred stock.

Moody's said FGIC has approximately $250 million in holding company liquidity to pay interest on its bank facility, and $325 million in senior bonds.

However, the operating company's limits on writing new business and its inability to upstream dividends without regulatory approval heightens the refinancing risk associated with the bank credit facility, which matures in 2010, the rating firm found.

Moody's noted that FGIC has guaranteed the termination payments for certain public finance-swap arrangements. Swap termination payments could be triggered if FGIC and/or (typically, “and”) the issuer were downgraded below certain rating thresholds and the issuer defaults on the termination payment, the rating agency explained.

Moody's said at this time FGIC is not exposed to imminent termination payments. However, Moody's said it will continue to monitor the situation to determine the extent of possible future termination payments and the implications to FGIC's liquidity profile and capital adequacy.

FGIC ratings remain under review for downgrade to reflect the heightened risk of FGIC breaching minimum regulatory capital requirements, and the uncertain consequences for policyholders and creditors of possible regulatory intervention, Moody's said.

Moody's stated that the ratings review will focus on additional details relating to FGIC's restructuring and recapitalization plan, any further movement in loss reserves at the end of this year's first quarter, the implications of potential swap termination payments to liquidity and capital, the company's ongoing compliance with statutory requirements, and the implications of any actions on the part of the regulator.

The downgrade of CIFG and its affiliates, Fitch said, is an updated assessment of CIFG's capital position, a review by Fitch of CIFG's updated business plan, consideration of various qualitative ratings factors, and an update on Fitch's current views of U.S. subprime related risks.

Fitch listed a multitude of reasons for the CIFG downgrade. Among them were a belief that CIFG's pro forma claims-paying resources–which include the $1.5 billion capital infusion in late-2007 from its shareholders Caisse Nationale des Caisses d'Epargne et Prevoyance (CNCE), and Banque Federale des Banques Populaires–are consistent with Fitch's updated standard for an “A” category level of capital.

However, claims-paying resources fall below Fitch's “AA” capital target by $1.2 to $1.7 billion.

While CIFG's future business plans will include an emphasis on municipal finance and several improvements to its risk management framework, including the exit from several higher-risk capital intensive structured finance business lines, Fitch believes that CIFG may be extremely challenged in achieving these goals.