Moody's Investors Service and Standard & Poor's say MBIA Inc. has enough capital to withstand losses and justify its AAA rating. MBIA's debt investors aren't so convinced.
Credit-default swaps indicating the risk that Armonk, New York-based MBIA's bond insurance unit won't be able to meet its obligations are trading at similar levels to companies such as homebuilder Pulte Homes Inc., which is rated 10 steps lower.
The discrepancy illustrates the skepticism debt investors have about the safety of MBIA's rating after the company posted $3.4 billion of losses on subprime mortgages last quarter. Moody's and S&P both said that while at least $4 billion of writedowns lie ahead, MBIA's management has made enough changes to warrant the top rating.
``Pardon me if I find this a little hard to believe,'' said Richard Larkin, director of research at municipal-bond brokerage Herbert J. Sims & Co. in Iselin, New Jersey. ``This is basically the same management that put MBIA into this hole in the first place.''
Moody's yesterday ended a five-week review of MBIA, the world's largest bond insurer, removing the threat of an imminent downgrade. S&P did the same a day earlier and also affirmed the top rating of New York-based Ambac Financial Group Inc., the second-biggest. Ambac is still under review from both S&P and Moody's.
Credit-Default Swaps
Credit-default swaps tied to MBIA's insurance unit rose 3 basis points today to 363 basis points, according to London-based CMA Datavision. The contracts, which rise as investors see increased risk and fall when confidence improves, have dropped 24 basis points the past three days. That's still up from less than 100 as recently as October. The contracts rose above 720 last month as banks, securities firms and investors used them to hedge against the risk that the firm wouldn't be able to make good on its insurance obligations.
Contracts on Bloomfield Hills, Michigan-based Pulte are trading at about 370 basis points, CMA price show. The BB+ rated homebuilder has reported five straight quarterly losses. The company is considered junk, or below investment grade.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
`So Much Uncertainty'
The decisions by Moody's and S&P to retain the ratings protected as much as $637 billion of debt from downgrade, avoided fire sales of municipal bonds and helped save banks from as much as $70 billion of losses, based on Oppenheimer & Co. estimates.
MBIA Chief Executive Officer Jay Brown, who returned to the post last week after the ouster of Gary Dunton, said the ratings decisions were unrelated to concerns a downgrade would roil credit markets. ``I think that's dead wrong,'' Brown told CNBC Television.
Moody's and S&P came under scrutiny from the U.S. Securities and Exchange Commission and Congress last year for giving excessively high rankings to securities backed by mortgages to people with poor credit and helping to inflate a bubble that burst last year and sent investors fleeing credit markets.
The ratings firms ``certainly have less credibility than they had before,'' said Dan Castro, chief credit officer of the structured finance business at GSC Group in New York. ``On the other hand, the affirmation gives investors a sigh of relief.''
MBIA shares, down 77 percent the past year, fell 22 cents, or 1.4 percent, to $15.06 as of 9:50 a.m. in New York Stock Exchange composite trading. Ambac, down 86 percent the past year, fell 2 cents to $12.17.
CDO Expansion
MBIA and the rest of the bond insurers were criticized by ratings companies, lawmakers and regulators over their decision to expand into collateralized debt obligations that caused losses of more than $7 billion. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities. CDOs are packages of debt sliced into pieces with varying ratings.
Moody's chose to retain the ratings even though it said MBIA likely faces $4 billion in losses. In a worst-case scenario, the company, which has claims-paying resources of $16.1 billion, could lose as much as $13.7 billion, Moody's said.
A credit rating cut would have stymied MBIA's ability to guarantee debt. Even now, sellers of municipal debt have avoided having their bonds guaranteed by MBIA. MBIA didn't sell any guarantees on municipal bonds issued during the first two weeks of February, according to data compiled by Thomson Financial and cited by Merrill Lynch & Co. last week.
Faces Losses
``MBIA still faces longer term issues about whether its franchise value has been permanently impaired by its credit derivatives exposure'' to subprime bonds and CDOs, Kathleen Shanley, an analyst at Gimme Credit LLC in Chicago, wrote in a report yesterday. ``The problems can't be neatly resolved overnight.''
Moody's said the decision to affirm the rating was in part because of MBIA's $2.6 billion in capital raising as well as this week's announcement that the company will stop guaranteeing structured finance securities for six months. That and a tightening in underwriting standards means risk is reduced, the ratings firm said.
To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Christine Richard in New York atcrichard5@bloomberg.net
