Doubt over the monolines' triple-A-rating stability has been the subject of negative headlines since last summer. While a downgrade would have a dire effect on a guarantor's business model, particularly in the municipal bond market, which is especially dependent on the triple-A guarantee, there may be capital financing alternatives, market participants say.
This month, CIFG Guaranty and Financial Guaranty Insurance Company (FGIC) were cited by Moody's Investors Service and Fitch Ratings as most likely to experience demands on their capital cushions, with Ambac Assurance and Security Capital Assurance (SCA) also under heightened scrutiny. Standard & Poor's put CIFG on rating watch negative.
While there have been guarantors that have operated with less than a triple-A rating (Assured Guaranty, which until recently was a rated Aa1' by Moody's, and Radian Group, which is rated Aa3' by Moody's), a ratings downgrade would be especially troublesome for a monoline's role in the municipal bond market, where they have traditionally dominated. In fact, roughly one half of municipal bonds outstanding are wrapped by the monolines, according to the independent credit research firm CreditSights. "It is certainly more difficult, especially in the municipal bond market, to operate with a lower rating," said Jack Dorer, managing director in the financial institutions group at Moody's, noting that investors in that market are often looking for triple-A protection, so issuers tend to go to triple-A providers. Indeed, many municipal bond mutual funds can buy only triple-A paper, or must maintain a certain percentage of the paper in their portfolios. As a result "a drop in a triple-A rating would be devastating for a monoline's role in the municipal bond market," said a market participant, noting that many municipalities on their own credit cannot get AAA' ratings. If a monoline lost that high-grade rating, "their negative basis trades would go down the toilet," he said.
However, the threat of a drop in ratings is not an actual downgrade, many say, adding that monolines will take the appropriate actions necessary to assure they retain a sufficient capital cushion. "We suspect that the monolines that will need to raise capital already have a good indication of who they are and how much they might need to raise," Seth Glasser, director and senior insurance analyst for U.S. Credit Research at Barclays Capital, said on recent conference call. He expected the market could see announcements from monolines in the coming weeks regarding reinsurance deals or capital commitments.
More Financial Hurdles
But fundraising is not an easy feat given the current market conditions and lack of faith in the guarantors. Indeed, while the simple way [to maintain a monoline's triple-A rating] is to raise capital, said Stanislas Rouyer, senior vice president in the financial institutions group at Moody's, given the current climate in the RMBS and ABS CDO market, it is much harder to do so. Therefore, monolines with a parent company that is able to infuse capital are in a better position, Rouyer said. "There have also been discussions about using various types of reinsurance, so maybe a cocktail of the two would be a solution that would work for a given company."
CIFG said it is working with its parent company to address liquidity concerns. "We understand the franchise value of our triple-A ratings and together with our parent company Natixis, we are committed to working with the rating agencies during their review and will take appropriate action to maintain CIFG's triple-A ratings," said a spokesman for the company. CIFG previously announced a $100 million growth capital contribution from Natixis.
Other capital-raising alternatives include preferred equity investments from shareholders, private investors or parties with heightened interest in seeing monolines retain their triple-A rating, Barclay's Glasser said. He also noted that a common equity investment would create additional capital, though it will be difficult to raise those funds given the decline in share price for the monolines. Though Ambac is not immediately concerned about its capital cushion, Peter Poillon, director of investor relations at Ambac, said that while reinsurance is the most flexible form of capital funding, a slowdown in writings of more capital-intensive types of transactions, for instance BBB' rated transactions in the ABS sector or certain sectors of the international market, will also help raise capital. "We may consider a combination of actions. We may consider doing some reinsurance, while slowing down on some of the more capital-intensive deals, to raise capital pretty swiftly." A spokeswoman for MBIA also said that depending on future developments in the economy, "it may consider taking steps to further bolster the company's capital position or to take advantage of potential new business or strategic opportunities in the marketplace." The company currently has $1 billion in claims-paying resources in excess of triple-A requirements, she said.
And monolines lower down the credit spectrum are also looking to protect their ratings. Single-A-rated guarantor ACA Capital Holdings said the company would not be able to afford the collateral posting requirements associated with a downgrade by S&P and is looking into restructuring its CDS to avoid the rating action. The rating is currently on rating watch negative.
But for now investors are reacting to the rating risk. Monolines' CDS spreads are at record wides, according to JPMorgan, who last week showed XL Capital Assurance (XLCA) CDS spreads topping the 500 basis point market. Credit Suisse pinned Ambac Assurance Corp. at 375 basis points, MBIA Insurance Corp. at 270 basis points and Financial Security Assurance at 102 basis points as of Nov. 15.
Calls to XLCA to address additional capital plans were not returned by press time. FGIC declined to comment.
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