A useful note out from Panmure in the wake of MBIA and Ambac’s downgrade last night. The most important point being:
Is this already priced-in? No.
As FT Alphaville earlier noted, though, it’s not necessarily direct exposures - via CDS counterparty risk for example - that banks are going to be impacted, though there are still - it turns out - significant numbers to behold:
Amongst the UK banks, the BARC and RBS monoline exposures stand out - BARC reported £2,784m in monoline exposures in its Q1 2008 trading statement, up from £1,335m as at end-Dec 2007. If the bulk of the increase was not in new positions but in the mark-to-model gains associated with existing contracts, then we think the up to £1.4bn of implied gains could be particularly at risk on the ratings downgrade of the underlying counterparty.
RBS is in a similar position, with £3.2bn of net exposure to monolines reported in the trading statement, released as part of the rights announcement on 22 April. This was comprised of £6.2bn in gross exposures, less £2.7bn of credit valuation adjustments and £0.4bn of offsetting hedges. Within the £2.7bn of credit valuation adjustments a £1,752m adjustment had already been recognised in order to reflect the weakening credit profile of some specific monoline counterparties; we expect that RBS will recognise further adjustments (read: charges) on the back of these recent downgrades.
In other words, potential writedowns circling in the region of £2bn a piece for Barcap and RBS. Uncomfortable stuff.
The bigger issue, then, is capital requirements under the Basel II regime. Securities downgraded from triple A to double A require 25 per cent more capital to be held against them. With the possibility of further downgrades to the monolines - and the securities they wrap - that could worsen. CDS on Ambac and MBIA are currently pricing in ratings of CCC, at which level, notes Panmure, risk weightings on associated ABS/RMBS/CDO/CLOs would be pushed to 1,250 per cent.
All of this, naturally, pending a Moody’s downgrade of the monolines too.
Barcap down 3.58 per cent at 366p and RBS down 1.6 per cent at 254p as of 11:30 BST.
