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Bond insurers are having a tough time due to their exposure to mortgage-related securities. Moody's Investors Service said on September 18 that it has placed the A2 rating of MBIA Insurance Corp. and the Aa3 rating of Ambac Assurance Corp., a unit of another bond insurer Ambac Financial Group, Inc. (ABK | Quote | Chart | News | PowerRating), on review for downgrade. As a result of the review, the rated securities that are guaranteed by Ambac and MBIA also were placed under review for possible downgrade, except those with higher public underlying ratings, the rating agency said.
Armonk, New York-based MBIA, the largest U.S. bond insurer, currently has $18.1 billion in outstanding liabilities related to its ALM business, including $11.2 billion in GICs. According to the company, up to $7.9 billion of the GIC portfolio can be terminated if MBIA Insurance Corp.'s rating is downgraded to Baa1 or below or BBB+ or below.
The remaining $10.2 billion in ALM liabilities consists of medium-term notes issued by MBIA Global Funding, LLC term repurchase agreements and GICs that are not subject to further collateralization or termination provisions upon a downgrade.
MBIA would currently need up to $3.4 billion in cash to fund potential termination payments under the GICs resulting from a downgrade to A3 by Moody's or A- by S&P. The company will also require up to an additional $4.5 billion in cash for potential termination payments resulting from a downgrade to Baa1 or below or BBB+ or below, for a cumulative total of $7.9 billion. MBIA said these amounts are lower than previously reported at the end of the second quarter due to amortization of the outstanding GICs. At present, MBIA has about $8.1 billion in cash and government securities in its ALM portfolio to satisfy these requirements. No additional collateral is required to be posted by a downgrade below MBIA's current ratings. All payments due on remaining liabilities related to the ALM business that are not subject to termination upon a downgrade are expected to be covered by available assets and other liquidity sources. Clifford Corso, MBIA's Chief Investment Officer, said, "As we indicated last Thursday, during the past three months we've worked to minimize the consequences to MBIA resulting from any changes in rating opinions. As a result of these efforts, we are well positioned to meet our future obligations on time and in full irrespective of any downgrade."
Last month, Standard & Poor's Ratings Services affirmed the 'AA' financial strength rating of MBIA Insurance Corp. and removed it from CreditWatch with negative implications. All dependent ratings were affirmed as well, while the outlook for the ratings was negative.
In fact, the ratings on MBIA and Ambac have been downgraded several times in the past due to the exposure of the two companies to mortgage-backed securities as well as collateralized debt obligations. Guaranteeing mortgage debt against default was a profitable business in the past. However, in the context of the current crisis, claims have been on the rise.
MBI closed Friday's regular trade at $12.88, down from the previous close of $14, on 153,000 shares. For the past year, the stock trended in the range of $3.62-$68.98.
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