Following S&P and in response to MBIA’s restructuring plan, Moody’s downgraded the bond insurer to B3 from Baa1 on Wednesday, and put MBIA Illinois (the new-fangled muni-only bit of the company) on watch for possible upgrade.
Here are highlights from the Moody’s statement, emphasis FT Alphaville’s:
Earlier today, MBIA announced the restructuring of its financial guaranty insurance operations following the approval of the New York and Illinois insurance regulators.
According to Moody’s, MBIA’s restructuring involves the segregation of its financial guaranty insurance operations into two separately capitalized sister companies, with one entity (MBIA Illinois) assuming the risk associated with its US municipal exposures, and with the other (MBIA Corp) insuring the remainder of the portfolio, including all international and structured finance exposures.
Under the terms of the transaction, MBIA Illinois (which is expected to be renamed National Public Finance Guarantee Corporation) has provided cut-through reinsurance on all of MBIA Corp’s existing portfolio of US municipal credits through a 100% quota-share agreement, including the municipal exposure that MBIA Corp assumed from FGIC. To support its ability to pay claims, MBIA Illinois has received a $2.1 billion capital infusion sourced through a dividend from MBIA Corp, in addition to $2.9 billion in net unearned premiums (net of ceding commissions) and loss and loss adjustment expense reserves associated with the municipal portfolio.
Post transaction, MBIA Illinois has approximately $537 billion in municipal net par outstanding and $5.7 billion in hard capital, while MBIA Corp has $240 billion in net par exposure and approximately $9.8 billion in hard capital (based on 3Q08 financial results).
The downgrade of MBIA Corp to B3, from Baa1, reflects two primary factors. First is the guarantor’s substantial reduction in claims-paying resources relative to the remaining higher-risk exposures in its insured portfolio, given the removal of capital, and the transfer of unearned premium reserves associated with the ceding of its municipal portfolio to MBIA Illinois. Second is the continued deterioration of the firm’s insured portfolio of largely structured credits, with stress reaching sectors beyond residential mortgage-related securities.
Moody’s recently published several Special Reports discussing the deteriorating credit profile of Alt-A mortgage-backed securities, corporate CDOs, and CMBS — all of which are negatively affecting MBIA Corp’s risk-adjusted capital adequacy. The rating agency noted that the claims-paying resources of MBIA Corp post restructuring are roughly equivalent to Moody’s expected loss estimates for the entity.
Moody’s stated that MBIA Corp’s developing outlook reflects the potential for further deterioration in the insured portfolio. It also incorporates positive developments that could occur over the near to medium term, including greater visibility about mortgage performance, the possibility of commutations or terminations of certain ABS CDO exposures, and/or successful remediation efforts on poorly performing RMBS transactions.
The company’s developing outlook is also based on the potential for various initiatives being pursued at the US federal level to mitigate the rising trend of mortgage loan defaults. Moody’s will continue to evaluate MBIA Corp’s ratings in the context of the future performance of its insured portfolio relative to expectations and resulting capital adequacy levels, as well as changes, if any, to the company’s strategic and capital management plans.
The review for upgrade of MBIA Illinois’ Baa1 insurance financial strength rating reflects upward rating pressure following the group’s restructuring, stemming from the company’s substantial claims-paying resources relative to its insured portfolio of high-quality municipal exposures. The review also includes the possibility of improved business prospects for MBIA Illinois in light of the company’s municipal-only focus and strong risk-adjusted capital adequacy.
Moody’s said that the potential for upward rating movement is tempered, however, by the significant challenges facing both MBIA Illinois and the financial guaranty industry in general. According to the rating agency, there continues to be a market for municipal bond insurance, but prospective opportunities in the municipal sector may be narrower than in the past given changing perceptions about municipal risk among buyers, lower confidence in the financial guaranty industry broadly and a trend toward alternative forms of execution, including the issuance of uninsured paper.
For these and other reasons, Moody’s noted that any upward rating revision would likely be limited to the single-A range. During its review, Moody’s will evaluate the impact of MBIA’s restructuring on the future business prospects of MBIA Illinois. As part of the review process, Moody’s will consider the company’s ability to regain market confidence, as well as the potential for and impact of any legal challenges coming from the counterparties of MBIA Corp.