Dow Jones, December 20, 2007
Confidence in top bond insurer MBIA Inc. (MBI) plummeted after the guarantor disclosed on its Web site that it had $8.1 billion in exposure to complex and risky securities backed by home loans. The insurer said these collateralized-debt obligations are backed by high-grade debt, with 85% of the collateral from other CDOs. Financial markets sent the company’s stock lower and the cost of protecting MBIA debt soaring, with a Morgan Stanley research note on the disclosure fueling concerns that the bond insurer’s troubles are deeper than originally thought.
Morgan Stanley analysts led by Ken A. Zerbe, who is known for his bearishness on the bond insurers, said that MBIA’s $8.1 billion of exposure to these securities, called CDO-squared transactions, is “massive.”
Ambac Investors Watch Ratings
An insurer in serious need of insurance is hardly a reassuring prospect for investors.
It is little wonder then that the shares of Ambac Financial Group Inc. (ABK) have plunged 70% in the past year, sparked by worries that the New York-based bond insurer may be on the hook for billions of dollars of mortgage-related securities gone sour, leaving its stellar credit ratings in jeopardy.
This is a key week for Ambac, which has guaranteed principal and accumulated interest on $556 billion of debt, including mortgage bonds. Fitch Ratings is expected to weigh in on the company’s triple-A ratings - crucial for its business of insuring securities - to determine whether Ambac’s $14 billion
war chest is adequate at a time when mortgage-related investments are going belly up at breakneck speed.
There could be wider ramifications. The fear is that a fall from triple-A by a major bond insurer will trigger a loss in value of the securities guaranteed by the insurer, spurring a broader reassessment of assets at a time when investors’ appetite for risk is feeble. As for Ambac, investors are also eagerly awaiting details from the company on how it expects to shore up additional cash to bolster its credit standing in case reserves fall short of the ratings companies’ requirements.
“It’s a confidence game. Everyone wants to know Ambac’s full capital plan,” said Rob Haines, an analyst at independent credit research firm CreditSights. The insurer “has to convince markets it has sufficient capital and that it is still a prudent risk manager.”
Investors lingering on the sidelines were somewhat reassured earlier this week, after Moody’s Investors Service affirmed the insurer’s triple-A rating. Its share price rose 16.75% to $26.63 Monday. Shares were at $96 in May. Ambac had a closer shave Wednesday with Standard & Poor’s, when the ratings company left the insurer’s triple-A standing intact but changed its outlook to negative.
Copyright 2007 © Dow Jones & Company, Inc.
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