Reuters: Fitch downgrades SCA ratings to junk bond status
Wed Mar 26, 2008 5:22pm EDT By Walden Siew
NEW YORK, March 26 (Reuters) - Fitch Ratings on Wednesday cut its ratings on Security Capital Assurance (SCA.N: Quote, Profile, Research) and its bond insurer unit XL Capital Assurance to junk bond status, citing their exposure to U.S. subprime mortgages.
Fitch said SCA's current level of capital and claims paying resources is no longer consistent with Fitch guidelines for an investment-grade rating.
Expected losses on SCA's structured finance collateralized debt obligations backed by mortgage bonds will fall within the range of $3 billion to $4 billion, Fitch said.
The rating company also cited SCA's recent disclosure that it unilaterally terminated seven credit default swap contracts with a Merrill Lynch & Co unit.
"Going forward, Fitch believes that it will be very difficult to stabilize the ratings of SCA until the company can both raise external capital and more effectively limit the downside risk" from its CDO exposure, Fitch said.
SCA said last week it severed seven credit guarantee contracts with a Merrill Lynch unit because the investment bank had given key rights promised to SCA under the contracts to at least one other party. For details, click [ID: nN20417902]
SCA also on Wednesday said it was cutting its work force by about 60 positions.
"The reductions are focused largely on the insurance business origination staff and are intended to reduce long-term operating costs and align resources with current needs," the company said in a statement.
Fitch said it cut SCA's long-term rating to "B-minus," or six levels below investment grade, from "BBB," the second-lowest investment grade.
It cut the insurer financial strength rating on XL Capital Assurance by six notches to "BB," the second-lowest junk rating, from "A."
XL Capital Assurance is the first U.S. bond insurer that was once rated "AAA" to be downgraded to junk status.
Moody's Investors Service on March 17 cut its ratings on Security Capital Assurance, parent of bond insurer XL Capital Assurance, citing a decision not to declare a semi-annual dividend.
SCA's board of directors recently decided not to declare a quarterly dividend on the company's common shares or the semi-annual dividend on its perpetual non-cumulative preference shares.
Moody's cut SCA's Series A preference shares to "B3," the sixth-highest junk rating, from "Ba2," the second-highest junk rating, reflecting increased expected losses on the security due to the omission of the dividend. (Reporting by Walden Siew; Editing by Dan Grebler)
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