The Wall Street Journal-20080119-Bond Insurers Weather Hit To Ratings- Investors Are Steady As First Downgrades Had Been Expected
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Bond Insurers Weather Hit To Ratings; Investors Are Steady As First Downgrades Had Been Expected
The first of an expected slew of downgrades hit the top-rated bond- insurance companies Friday, but investors didn't flinch.
The reaction bolsters the view that the market was prepared for the moves and that shareholders of the bond insurers are more concerned with the companies themselves than they are with the bonds these companies have insured.
Investors have braced for the moves in recent weeks, as the major credit-rating firms threatened to downgrade the insurers because of their exposure to securities tied to subprime mortgages. The two biggest insurers, MBIA Inc. and Ambac Financial Group Inc., have long maintained triple-A financial-strength ratings, which they used to insure some $2.4 trillion of bonds.
By promising to pay off the bonds if they defaulted, the insurers were essentially sharing their strong ratings, which made the bonds less risky and allowed the bonds' issuers to pay lower interest rates.
The first of those triple-A ratings fell by the wayside Friday when Fitch Ratings, a unit of France's Fimalac SA downgraded Ambac, which insures more than $600 billion in bonds outstanding. Fitch downgraded Ambac to double-A because the New York bond insurer scrapped a plan to raise $1 billion in the stock market to shore up its capital. It also said Ambac was on review for further possible downgrade.
Stock investors, who have slammed Ambac and MBIA in recent weeks, largely ignored the news, even though it could mean the end of Ambac's business selling insurance. Ambac shares were up most of the day and ended down four cents to $6.20 in New York Stock Exchange 4 p.m. composite trading.
Investors in municipal bonds, which is the biggest market for the bond insurers, said prices didn't react to the downgrade in part because the possibility of a downgrade was already reflected in their prices in recent weeks. Late Friday, as part of its Ambac change, Fitch also took ratings actions on 137,390 municipal bonds insured by Ambac.
Further downgrades are expected and could roil markets. "We're heading deeper into uncharted territory," said David Havens, an analyst at UBS Securities.
The expected turmoil fueled rumors of government orchestrated bailouts funded by the big Wall Street banks and others who stand to lose billions of dollars if they lose the insurance on the battered securities they are holding. People familiar with the matter said regulators are watching the situation carefully, but don't see the need for immediate action.
One reason a bailout might not be necessary is the bond insurers aren't on the hook for big cash payments the moment bonds default. Instead, they make the bonds' regular interest payments until maturity, which could be decades away. During that time, the insurers should continue to get premium payments on the bonds. Also, a downgrade doesn't mean MBIA or Ambac will have to post additional collateral, so they are unlikely to face a cash crunch.
The ratings firms, which include Moody's Investors Service and Standard & Poor's, have been in an increasingly contentious standoff with the bond insurers, which began last month when the ratings firms said they would downgrade the bond insurers unless the insurers raised more capital. MBIA went out and raised $1 billion only to see Moody's threaten to downgrade the debt about 10 days later. That sent the value of the securities plummeting by 25%.
"At this point, it's unclear what the hurdle is that we have to surmount," said Chuck Chaplin, head of investor relations at MBIA. The company says it isn't talking to third parties about seeking more capital at the moment
Earlier in the past week, Moody's changed its view issued just a month ago on Ambac, just as Ambac was readying its own $1 billion bond issue. That forced Ambac to scrap the capital raising. "Now we have to start from square one," says Peter Poillon, head of investor relations at Ambac. "It is very, very difficult to raise capital in the public markets with a Moody's downgrade looming."
The ratings firms defend their actions, saying they are responding to worsening market conditions after the bond insurers strayed into the area of mortgage-related securities, which is far riskier than the government bonds that had been their core business.
Ambac "wandered into sectors and asset classes where they didn't comprehend all the risks," said Thomas J. Abruzzo, a Fitch managing director. As of Sept. 30, Ambac had exposure to about $60 billion of collateralized-debt obligations, according to Ambac's Mr. Poillon. MBIA had CDO exposure of about $130 billion, of which about $30 billion was mortgage-related, said MBIA's Mr. Chaplin.
Shareholders in the bond insurers were hoping that they would not raise capital because their stake in the companies would be worth less.
Evercore Asset Management, a New York investment firm that holds about 700,000 of Ambac's shares, urged the company in a public letter on Thursday to accept a downgrade rather than raise capital.
In the municipal-bond market, the biggest fallout could be that governments that issue the bonds could pay a higher yield. But few muni bonds ever default, and when they do, investors generally get back most of their money, so bond market experts say the fallout could be minimal.
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Serena Ng contributed to this article.
