NU Online News Service, Jan. 26, 3:07 p.m. EST
Standard & Poor's Ratings Services said it will be accepting comments on its proposal to revise rating criteria for bond insurers that could lead to downgrades unless the companies raise additional capital or reduce risk.
S&P said its proposed methodology would consider two major categories. The first, business risk profile, would analyze management and corporate strategy, industry risk, and competitive position of a bond insurer. Industry risk and competitive position would have the greatest influence on a company's business risk profile score, according to S&P.
"The business risk profile is defined by the risk/return potential for markets in which the company participates, the competitive climate within those markets, the competitive advantages and disadvantages the company offers within those markets, and the effectiveness of the company's management and corporate strategy," S&P said.
The second major category would be financial risk profile, which would take into account capital adequacy, operating performance, investments, and financial flexibility. Capital adequacy and operating performance would hold the greatest sway over a company's financial risk profile score.
"The financial risk profile is the outgrowth of decisions that management makes in the context of its business risk profile and its risk tolerances," said S&P. "It also reflects the operating margins we believe management can achieve in the context of the choice of businesses it participates in, its growth strategies, and its risk/reward choices."
S&P said it is also introducing two new bond insurance criteria: weak link filters and sector stress tests. "In our view, ERM, liquidity and operating leverage are aspects of a rating that can override other factors and, in certain circumstances, constrain a rating," S&P said.
S&P said of its proposal, "If we adopt the proposed criteria, we will significantly change our rating methodology for bond insurers by introducing a framework that combines nine analytical categories in a consistent manner. We believe this should provide further clarity around our rating methodology by defining how we combine these elements."
Regarding possible ratings impact to bond insurers, S&P said that unless the companies raise more capital or reduce risk, it would expect movement in one or more ratings categories. "In particular, the amount of capital needed to achieve high investment-grade ratings will increase significantly under the proposed criteria because of higher capital charges used in scoring capital and the new leverage test," the rating agency said.
S&P said market participants may submit written comments on the proposed criteria by March 25, 2011 to CriteriaComments@StandardandPoors.com.
At the same time, S&P Equity Research, which operates independently of the rating operation, raised its recommendation on bond insurer MBIA's shares to "hold" from "sell."
S&P Equity Research said, "[MBIA] shares have fallen nearly 17 percent in the past two weeks. We attribute this pressure to concerns over [MBIA's] business model and capital adequacy that was recently increased with a pronouncement from S&P Ratings…that could lead to further ratings downgrades. We trim our target price by $1 to $12, assuming the shares trade below stated book value, a discount to the [property and casualty] group average. In light of a very mixed outlook and our view that [MBIA] may have to raise additional dilutive capital, we would not add to positions."
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