Real Estate Lender Implosion

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Bond Insurers are in a heap of trouble

Monday December 17, 12:44 pm ET

Shares of Bond Insurers Climb After Moody's Affirms Ratings for Ambac, Assured Guaranty

NEW YORK (AP) -- Shares of bond insurers climbed Monday after a major credit agency maintained its ratings on Ambac Financial Group Inc., offering hope that the biggest impediment hampering the stocks could soon be eliminated.

Moody's Investors Service on Friday affirmed Ambac's "AAA" financial strength rating. Moody's also maintained its ratings on Assured Guaranty Ltd. and MBIA Inc., though Moody's put a negative outlook on MBIA.

Stocks in the sector have plummeted in the past few months on the prospect of ratings downgrades as Moody's, Standard & Poor's, and Fitch Ratings consider whether this year's credit crisis will undermine bond insurers' financial strength.

Few sectors are more reliant on financial strength ratings than bond insurers, as the companies underwrite insurance policies promising to repay bond owners when bond issuers default.

As credit quality deteriorates across the country, investors are worried bond insurers will have to foot the bill for missed payments on bonds and other contracts.

At Friday's close, MBIA's stock was down 62 percent and Ambac's stock was down 74 percent for the year.

Friedman Billings Ramsey analyst Steve Stelmach on Monday upgraded Ambac to "Outperform" from "Market Perform," saying it appears the company will manage to maintain enough cash to mollify the credit agencies and keep its rating.

Shares of Ambac Financial jumped $3.41, or 15 percent, to $26.22. The stock is still down 59 percent since the beginning of October.

Shares of MBIA added $1.07, or 3.9 percent, to $28.67. Shares of Assured Guaranty climbed 90 cents, or 3.6 percent, to $25.62. Shares of Security Capital Assurance Ltd. rose 9 cents, or 2.2 percent, to $4.21.

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S&P Downgrades ACA to Junk Status

Wednesday December 19, 2:06 pm ET

By Stephen Bernard, AP Business Writer

S&P Downgrades ACA Financial to Non-Investment Grade "CCC" Rating From Investment Grade "A"

NEW YORK (AP) -- A major insurer of bonds was downgraded to "junk" status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.

Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A."

The downgrade of ACA led S&P to cut ratings on nearly 3,000 municipal bonds, which could may spark a municipal borrowing crisis, according to Peter Schiff, chief executive of Euro Pacific Capital.

"Many municipalities get high credit ratings because their bonds are insured," said Schiff. "Higher borrowing costs for cities will force them charge higher property taxes, which will increase the strain on consumers. And some cities may be shut out of the credit markets."

The new strain on civic funding comes at the same time that plummeting home sales and values and rising mortgage defaults threaten to drain local coffers of property taxes. Many cities have been banking on higher property taxes, but now homes are being valued lower and this also reduces funds available to the cities, he said.

The developments also imperil the already troubled market for securities that use mortgages as collateral. It now is growing more likely that mortgage insurers also will be unable to provide financial backing for home loans, making more problems for homeowners as well as the mortgage-backed securities market, Schiff said.

The downgrade of ACA will essentially not allow it to continue insuring bonds, since most people will not buy insurance on bonds from a firm that does not have top-quality ratings.

Downgrades of bond insurers can also lead to losses at the companies who use them. Only minutes after S&P's downgrade of ACA, CIBC World Markets said insurance for $3.5 billion in securities it holds backed by subprime mortgages may no longer be viable.

"It is not known whether ACA will continue as a viable counterparty to CIBC," the Canadian firm said. CIBC said there is a "reasonably high probability" it will take a large charge for the period ending Jan. 31.

The S&P action on ACA comes amid reports investment banks, including Merrill Lynch & Co. and Bear Stearns Cos., were in talks to bail out the struggling bond insurer. Merrill Lynch and Bear Stearns were not immediately available to comment. ACA did not immediately return calls seeking comment.

As part of a mass review of the bond insurers, S&P also placed Financial Guaranty Insurance Co. on negative credit watch. FGIC currently carries a "AAA" rating. A negative watch means there is a one-in-two chance the rating could be downgraded in the next three months.

Ambac Financial Group Inc., MBIA Insurance Corp. and XL Capital Assurance Inc. were all placed on a negative outlook by S&P, though their ratings remained unchanged. A negative outlook means there is a one-in-three chance ratings will be cut in the next two years.

Shares of ACA were trading over-the-counter at 54 cents in afternoon trading. ACA shares had traded as high as $16.55 earlier in the year.

AP Business Writers Jeremy Herron and Leslie Wines contributed to this report from New York.


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