MBIA and Ambac are not going to take a downgrade lying down. The insurance providers pushed back after Moody'ssent their shareholders running with whispers of lower ratings.
The two bond insurers are under review due to concerns about deterioating asset portfolios, weak financial positions made worse by falling stock prices and their inability to raise additional capital. There is also concern about the two companies' ability to generate new business with bruised reputations in a tumultuous business environment.
In response to Moody's (nyse: MCO -news - people ) move, MBIA (nyse: MBI -news - people ) Chairman and Chief Executive Officer Jay Brown said: "When Moody's affirmed our rating with a negative outlook in February, we believed that it would refrain for six to 12 months from taking additional ratings actions unless the environment or MBIA's position changed materially. Since then, there have been no material adverse changes in the environment, and we believe our capital position has improved."
Brown added that shareholders should understand that the company has no problem covering all policyholder claims. He said that the $900.0 million taken from the holding company and given to MBIA Insurance in May was to pad the Aaa rating and not to cover claims.
"We have successfully raised over $2.6 billion in debt and equity, the most in our industry, and further improved our capital position by approximately $400 million in the first quarter through the retirement of insured exposures and ratings upgrades within our existing insurance portfolio," said Brown.
Yet, shareholders sided with Moody's. Shares of mortgage insurers MBIA plunged after credit-rating agency Moody's said it is likely to lower its ratings on the companies' bond insurance arms because of concerns about mortgage-related losses and inadequate prospects for new business growth.
Investors kicked these already depressed companies down further on Wednesday. Ambac fell 17.0%, or 51 cents, to close at $2.49, and MBIA tumbled 15.8%, or $1.06, to $5.63 at the end of trading on Wednesday.
Ambac's management had something of its own to add. "We are disappointed by the Moody's announcement, particularly in light of the significant progress we have made to strengthen our capital position and refocus our business."
The company added that it has raised $1.5 billion of capital since March and that it is anticipating a $500.0 million capital cushion by the end of the second quarter.
The two troubled outfits are likely to be cut to the Aa level, which would be one to three notches lower than its current Aaa rating, though a drop to the single-A range also is possible, Moody's said. The ratings of assets insured by the companies, which includes municipal debt, are also likely to be cut, except when the rating of the underlying asset is higher than that of the insurers.
Bond issuers typically buy insurance to raise their ratings. An insurance policy rated less than triple-A would have little value, especially since most insured bonds are in the single-A area anyway; premiums would be prohibitively high on anything much lower, and a double- or triple-A-rated issuer would derive little benefit from the small boost the insurance provides.
The bond insurance business was profitable but slow-growing. Industry participants tried to branch out by providing insurance on products more exotic than municipal bonds, but in so got caught up in the subprime loan crisis.
James Eck of Moody's told Forbes.com that in rating the two companies, the impact a downgrade would have on their business prospects "is certainly one of the things we will contemplate." He said that should the downgrades occur the two companies could temporarily stop writing new insurance, allowing risky loans to mature and thus improving their capital position.
Whether they would have much of a market left once things settle down is open to debate.
Earlier this year, heavy hitters Warren Buffett and Wilbur Ross decided to enter the municipal bond insurance business, taking advantage of the turmoil that engulfed MGIA and Ambac. (See "Billionaires Pounce On Bond Insurers' Stumble")
MBIA and Ambac are hampered from raising new capital, as their stock-market values have plunged, making new shares a hard sell, and their cost of accessing the debt markets is very high, Moody's said.
Moody's ratings review of Ambac was prompted partly by concerns about the deterioration in its financial flexibility since the company's March $1.5 billion capital raise. This financial tight-spot was seen as proven in light of its "substantial decline in the firm's market capitalization and high current spreads on its debt securities."
MBIA had an equally bad preliminary report card, but with a few twists. Moody's cited MBIA's first quarter report as being "indicative of continued deterioration within the guarantor's insured portfolio" and said it will investigate the risks from exotic mortgage-backed securities that could default.
