Moody's Downgrades MBIA

Moody's said it has changed the rating outlook of MBIA Insurance Corporation (MBIA Corp.) and supported insurance subsidiaries to negative.

"These rating actions reflect further expected insured portfolio deterioration at MBIA Insurance Corporation and the uncertainty stemming from ongoing litigation challenging MBIA's recent restructuring," Moody's said.

The confirmation of National's rating with a developing outlook, Moody's said, reflects the fact that despite a strong capital profile and operational infrastructure, there is uncertainty caused by ongoing litigation challenging the recent restructuring of the group and the extended time frame over which such uncertainty may persist.

It was noted that creditors and counterparties have sued MBIA, requesting that the February 17 restructuring of the group that led to National's capitalization with some of MBIA Insurance Corp's resources be reversed.

Moody's said National's ability to write new business "may be substantially constrained while the litigation remains outstanding, given the uncertainty as to its outcome."

On the positive side, the rating firm said that a resolution of the litigation "that provides clarity on the separation of National from MBIA Corp., without reducing the current level of financial resources at National," could lead to an upgrade of National's rating in the future.

On the other hand, "a resolution that jeopardizes the separation and/or diminishes the financial integrity of National could lead to a downgrade; this potential for divergent outcomes is reflected in Moody's developing rating outlook for National."

The downgrade of MBIA Inc.'s senior debt rating to "Ba3," and downgrade of MBIA Insurance Corporation's surplus notes and preferred stocks ratings, Moody's said, reflects the continued severe stress faced by MBIA Insurance Corp. This is a result of its exposure to asset-backed securities (ABS), collateralized debt obligations (CDOs) and residential mortgage-backed securities (RMBS).

Taking account of recent performance experience, Moody's said its updated estimates of losses for ABS CDOs show substantial increases from prior estimates. Estimated losses on direct RMBS exposures also have increased, although not as significantly. Moody's expected losses for ABS CDOs and RMBS now approximate 19 percent and 14.5 percent, respectively, of the associated par outstanding, with losses under a stress scenario materially above those levels.

Absent better loss development than currently anticipated, Moody's said it believes "MBIA will likely pursue a negotiated settlement of some of these exposures under terms similar to a distressed exchange."

However, the rating firm found meaningful uncertainty about the actual losses that MBIA will incur, due in part to the lack of consensus about the direction of the economy and its effect on portfolio credit performance.

Moody's noted that MBIA's loss reserves are substantially lower than Moody's expected loss on ABS CDO and RMBS transactions. It noted that MBIA is suing some mortgage lenders for breach of representations and warranties and Merrill Lynch for fraudulent conduct in arranging ABS CDO transactions, and both actions could potentially materially reduce losses to MBIA.

However, the legal battle over the group's restructuring could potentially limit MBIA Inc.'s access to National's resources or further link MBIA Inc. to the fortunes of MBIA Insurance Corporation, Moody's said.

FGIC policies reinsured by National Public Finance Guaranty Corporation are unaffected by today's rating action as the reinsurance agreement does not qualify for credit substitution under Moody's methodology, because it allows FGIC to terminate the reinsurance agreement without a final payment being made by MBIA, the rating firm explained.