Fitch Warns of Possible Downgrade of MBIA Bond Insurance Units

Just three weeks after reaffirming the industry leader at AAA, Fitch Ratings warned on Tuesday that could downgrade its top-level ratings on the bond insurance units of MBIA Inc.  
  
The warning comes as Fitch, which also said it could downgrade the AAA-rated units of CIFG Guaranty, re-evaluates the industry in light of its new view that losses on complicated securities insured by MBIA and others could see much higher losses than expected. The change is as a result of projections of greater losses on sub-prime mortgages underlying the securities.  
  
In a significant shift, Fitch now believes losses may be significant enough that bond insurers that have guaranteed payments on large volumes of collateralized debt obligations may not merit their coveted AAA ratings even if they are able to raise more capital and shore up their ability to absorb claims. That could make further downgrades a virtual certainty.  
  
"A material increase in claim payments would be inconsistent with "AAA" ratings standards for financial guarantors, and could potentially call into question the appropriateness of "AAA" ratings for those affected companies, regardless of their ultimate capital," Fitch wrote in a release.  
  
Bond insurers effectively rent their credit ratings to lower-rated issuers so they can raise funds at lower cost, so their AAA rating is crucial to their ability to win new business. The insurers traditionally focused on low-risk municipal debt and have historically operated on relatively lean capital cushions as a result.  
  
But concerns have mounted following a move into guaranteeing complicated bonds that have fallen sharply in value as losses on mortgages mounted. The issue has broad implications, as the insurers back some $2.4 trillion in debt that could lose value in the event of downgrades. They've also sold billions of dollars in hedges to banks that probably will have to book another $40 billion in losses this year, according to Oppenheimer analyst Meredith Whitney.  
  
MBIA has raised $1.5 billion in fresh capital over the past two months and plans to raise another $500 million to defend its AAA rating. Fitch, a unit of Fimilac SA, said that may not be enough.  
  
"Fitch expects that both simulated capital model losses and expected losses will increase materially for MBIA because of the company's significant structured finance collateralized debt obligation exposure within its insured portfolio," Fitch said.  
  
Fitch also said CIFG's "current capital position may be insufficient to cover the required capital at the AAA rating threshold."  
  
As of Sept. 30, MBIA had guaranteed $30.6 billion in structured finance collateralized debt obligations; CIFG had guaranteed $9.2 billion, Fitch said.  
  
Fitch already cut the AAA ratings of bond insurance units of Ambac Financial Group Inc., FGIC Inc. and Security Capital Assurance Ltd. All three remain on watch for further downgrade.  
  
Moody's Investors Service, a Moody's Corp. unit, and Standard & Poor's already had put MBIA on watch for downgrade.