We know there’s little love lost between the big US bond insurers and credit rating agencies but recent developments as the monolines struggle to keep their top ratings have raised their increasingly bitter tussle to a new level - not least as some bond insurers, and now some bloggers, go on the attack about disparities between the assessment methods of the big three rating agencies.
How, they ask, could the three big agencies, using the same figures, come out with markedly different conclusions from their various reviews? We’d like to know ourselves.
The FT highlights on Tuesday how the problem prompted MBIA last Friday to take the unprecedented step of asking Fitch to stop rating its insurance business. It also contributed to uncertainty for Ambac during rescue talks. And last week, CIFG lost its triple-A rating from both Moody’s and Fitch, just days after its top-notch credit status was affirmed by S&P.
As CIFG chief executive John Pizzarelli noted: “Because each of the rating agencies is using a different methodology, it is very difficult for financial guaranty companies, like CIFG, to satisfy the divergent rating agency requirements.”
That may be putting it too mildly for MBIA, which is currently focusing on a five-year plan to split its municipal bond and structured finance business lines into two separate insurance businesses. As the FT noted, MBIA said if it followed Fitch’s capital model then the bond insurer’s municipal business would hold approximately half the capital required by Moody’s and S&P. However, Fitch would want the structured finance business to hold up to three times the capital demanded by Moody’s and S&P.
MBIA cited this disparity as a key reason for asking Fitch to stop rating its insurance business. The insurer’s triple-A rating from Fitch is on watch for downgrade.
But Fitch is fighting back, suggesting it will continue to rate MBIA without the insurer’s co-operation.
In a letter to MBIA, Fitch CEO Stephen Joynt questioned the company’s reasons for trying to end their relationship:
I have no love affair with Fitch. They have made massive mistakes over the past few years and a wimpy one notch downgrade on MBIA would be another one. Three grades is insufficient but I would take that as an act of good faith.
It’s important to remember, however, that every journey begins with a single step, and this is a big step in the right direction. I applaud Fitch’s stand against MBIA while asking MBIA “What exactly is it you want Fitch to destroy?”
If Fitch continues to take the high ground, it can regain credibility in due time. This is a welcome start, nothing more, nothing less. We now need to see followup action.
Meanwhile, notes the FT, while uncertainty over rating reviews has contributed to volatility for the bond insurers’ stock and bond prices, it has also affected the broader market.
In its original letter to Fitch requesting the removal of its rating, MBIA said: “In the 24/7 information-driven markets of today, the mere rumour of a potential change in ratings methodology or a rating committee meeting can drive the equity market, the CDS [credit default swap] markets, and cause wild speculative pricing in the extremely low frequency-of-loss US public finance market.”
That seems a fair point, though in this escalating war of words, it’s not entirely clear who is in the right. For now, what is clear is that the monolines must tread a very, very careful path - and keep up the financial juggling - to maintain top ratings from all three agencies.
