Late on Monday, S&P downgraded MBIA, once the strongest of the bond insurers, by two notches to BB+. That’s right — into ‘non investment grade’ territory.
As RBS’ credit analysts pointed out in a note on Tuesday, the downgrade served as a timely reminder that banks’ capital woes aren’t over yet:
Great timing as ever from a rating agency, right at the end of the Q3 season (as a reminder Moody’s cut MBIA to junk at the end of Q2). S&P is in a nutshell still concerned over continuing loss development on the asset classes MBIA is exposed to in its insured portfolio. This serves as a reminder that the monoline issue is still around and banks with MBIA exposure include BNP and Socgen, amongst others. Plus the more recent monoline debacle was a late July event (Ambac deep junk cut and big loss) so expect Q3 hits for the materially exposed also which also include Barclays and DB, Swiss Re and ANZ
Here’s S&P on the downgrade, emphasis ours:
S&P: MBIA Insurance Corp. And MBIA Inc. Downgraded; National Public Finance Guarantee Corp. ‘A’ Ratings Affirmed
* We have increased concern about the continued adverse loss development within MBIA Corp., specifically with non-public finance transactions.
* In addition, sizeable exposures to certain asset classes within the insured portfolio could create significant losses and balance-sheet volatility.
* As a result, we have downgraded MBIA Insurance Corp. and MBIA Inc.; the outlook is negative.
* We have affirmed our ‘A’ ratings on National Public Finance Guarantee Corp., and the outlook remains developing.
“We downgraded MBIA and the holding company because macroeconomic conditions continue to contribute to losses on the group’s structured finance products,” explained Standard & Poor’s credit analyst Damien Magarelli. Losses on MBIA’s 2005-2007 vintage direct RMBS and CDO of ABS could be higher than we had expected. However, the downgrade also reflects potentially increased losses in other asset classes, including but not limited to CMBS and–for other years prior to 2005–within RMBS.We affirmed our ratings on National, which assumed MBIA’s U.S. public finance business, because it is not exposed to structured products. The rating on National reflects our view of both its uncertain business and capital-raising prospects. Management’s stated goals are to raise additional capital to bolster National’s current resources and effectively ring-fence National from MBIA and its more volatile book of business. However, the ring-fencing actions it has taken so far have had limited impact in that we view National as no more or less ring-fenced than any typical bond insurance subsidiary operating in a consolidated group. In addition, the legal challenges the company faces as a result of its restructuring are, in our opinion, an impediment to both business prospects and capital-raising efforts.
“The negative outlook on MBIA and the holding company reflects our view that adverse loss development on the structured finance book could continue,” Mr. Magarelli added. In the next few years, liquidity will likely be adequate to meet debt-service and holding-company obligations (including operating expenses). However, increased losses and earnings volatility could still occur. We expect that the company will maintain a sufficient number of experienced staff members to support surveillance and remediation efforts within the various business segments, with a focus on liquidity risk management. Considering the runoff nature of the franchise, it is unlikely that we would raise the rating. Alternatively, if there were increased losses within the investment portfolio, potential reserve charges, or diminished liquidity, we could take a negative rating action.
The outlook on National is developing. We could raise the rating if there is a favorable resolution of the current litigation, which in turn could facilitate capital-raising efforts and lead to more tangible separation of National from MBIA and MBIA Inc. Improving business acceptance could be an outgrowth of these developments, which could lead to a rating in the ‘AA’ category. Alternatively, an ongoing lack of market acceptance and continued weak financial flexibility could result in a downgrade to the ‘BBB’ category.
Related links:
Monoline vertigo – FT Alphaville
Ambac clings to life – FT Alphaville
Bond insurers vs investment banks, redux – FT Alphaville