Emma Moody of Bloomberg.com reported on April 4, 2008 that Fitch Ratings cut MBIA’s insurance rating from AAA to AA on the grounds that the bond insurer no longer had sufficient capital to retain the top rating. According to Fitch, MBIA, the world’s largest bond insurer, would need as much as $3.8 billion in additional capital to deserve an AAA rating. Fitch also cut MBIA’s long-term rating from AA to A.
MBIA had already raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus, LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months. These steps were enough to satisfy the other two credit rating organizations. Both Moody’s Investor Service and Standard & Poor’s affirmed the top rating for MBIA. Fitch, however, continued its review.
Fitch estimates that MBIA will have losses on collateralized debt obligations (CDOs) backed by subprime mortgages of up to $4.9 billion even after taking into account that they will be paid over time. Fitch’s analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those that originated in 2007 will lose 26 percent.
Bond insurers stumbled after expanding from their traditional business of insuring bonds sold by schools, hospitals and municipalities. Their foray into structured finance business, including CDOs and asset-backed securities, has caused losses of more than $7 billion since the subprime implosion started. More downgrades ? and more losses ? may lie ahead.
The impact of this downgrade remains to be seen. Past downgrades of bond insurers have adversely affected some municipal bonds and auction rate securities, among other investments.
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