Time was when a statement from one of the big two bond insurers would induce a market panic. This is no longer true, but there’s still a lot happening at MBIA and Ambac - not least Moody’s threatening to downgrade them yet again.
Per MBIA today:
…MBIA has sufficient cash and government securities in its ALM portfolio to fund potential termination payments under its insured Guaranteed Investment Contracts (GICs) in the event of any ratings downgrade of MBIA Insurance Corporation by Moody’s Investors Service or Standard & Poor’s Ratings Services.
MBIA would currently need up to $3.4 billion in cash to fund potential termination payments under the GICs resulting from a downgrade to A3 by Moody’s or A- by S&P and up to an additional $4.5 billion in cash for potential termination payments resulting from a downgrade to Baa1 or below or BBB+ or below, for a cumulative total of $7.9 billion. These amounts are lower than previously reported at the end of the second quarter due to amortization of the outstanding GICs.
Currently, MBIA has approximately $8.1 billion in cash and government securities in its ALM portfolio to satisfy these requirements. No additional collateral is required to be posted by a downgrade below MBIA’s current ratings. All payments due on remaining liabilities related to the ALM business that are not subject to termination upon a downgrade are expected to be covered by available assets and other liquidity sources.
Meanwhile, Ambac said on Friday that a multi-notch downgrade to BBB- / Baa3 would result in a capital shortfall of $2.1bn, noting:
Upon a downgrade below the current rating level, Ambac estimates that the GIC asset portfolio is insufficient to cover the projected cumulative collateral requirement and terminations.
Moreover, the threatened Moody’s downgrade has forced a “re-evaluation of the plans and the timeline for [Ambac’s] Connie Lee effort.”
Connie Lee is - or would have been - Ambac’s shiny new financial guarantee subsidiary focused on the municipal sector, with a launch date set for the fourth quarter of this year.
