The rating of bond insurer Financial Guaranty Insurance Co. was recently cut three levels to Baa3 from A3 by Moody’s Investors Service. The insurer’s credit rating strength now teeters one step above junk status because of the company’s inability to raise new capital and the likelihood it will breach regulatory requirements. Moody’s also lowered its senior debt rating on the holding company to B3 from Ba1.
“The cushion above the required regulatory minimum may not be sufficient to absorb additional losses associated with FGIC’s mortgage related exposures,” Moody’s analysts Arlene Isaacs-Lowe and Jack Dorer stated.
High-yield (junk) bonds are rated below Baa3 by Moody’s and below BBB by S&P. As rising losses from mortgage-linked debt erode capital, bond insurers are struggling to hold on to their credit ratings. FGIC is a New York based company that has since stopped writing new business. To date, the insurer has had its financial strength rating slashed six levels to junk by Standard & Poor’s.
In its release, Moody’s wrote that in order to “reflect the heightened risk of FGIC breaching minimum regulatory capital requirements and the uncertain consequences for policyholders and creditors of possible regulatory intervention,” it plans to keep FGIC under review.
In a statement issued by FGIC, the insurer said that it needs to file a plan of action to the New York state insurance department because the amount of total risk has exceeded a regulatory limit.
“They’re not out of the woods yet,” Eric Dinallo of the New York state insurance department said. “We have a plan that we’ve given the company about how to search for capital and then how to resolve where they’re going to eventually end up.”
FGIC’s situation reflects the ongoing problems being experienced by bond insurers as a result of their foray into insuring structured finance vehicles. The continuing deterioration of bond insurers continues to present problems in various segments of the market including the municipal market and the auction rate securities market.
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