Financial analysts are unfazed by Moody's Investors Service's downgrade of MBIA and National Public Finance Guarantee Corp. (NPFG).

On Monday, Moody's announced a downgrade of MBIA to 'B2' from 'Ba3' and the insurance financial-strength rating of NPFG to 'Baa2' from 'Baa1'. It also changed the outlook for NPFG to negative from developing.

Moody's attributed the downgrade of NPFG to a weakening of the overall MBIA group's market standing as losses grow at National's affiliated companies, principally MBIA Insurance Corp. It also noted the risk that resources at National could be drawn away to support losses elsewhere within the group.

The bond insurer lost its triple-A ratings in the financial crisis and has been struggling to get back in the municipal guarantee business.

MBIA's problems stem from the busted real estate bubble, during which many banks made dubious loans and securitized them. MBIA and other companies insured these securities through issuing credit default swaps to Morgan Stanley and other banks.

When the recession hit in 2008, real estate values plunged, unemployment spiked, and many homeowners stopped making payments on their mortgages. The securities turned out to be worth far less than promised.

After the securities failed, many banks asked MBIA to make good on its pledge to insure them.
In 2009, MBIA decided to place its financially healthier municipal insurance business in a new unit. It left MBIA Insurance Corp. to insure structured finance products including MBS and non-U.S. public finance. This unit, which included some weaker performing parts, would pay claims on the mortgage-backed securities that MBIA had guaranteed before the crisis. In response, several banks sued parent company MBIA Inc. This is called the transformation litigation.

For its part, MBIA sued the banks for misrepresenting the soundness of the mortgage loans that the banks had MBIA insure.

Observers said they thought the Moody's downgrade would not affect MBIA's future.

"It really does not matter much," said Rob Haines, senior U.S. insurance analyst at CreditSights. "What matters will be a final settlement of all the transformation and put-back litigation. If that goes MBIA's way, then all the agencies will need to adjust their ratings."

Manal Mehta, co-founder of hedge fund Branch Hill Capital, which owns MBIA stock), agreed.

"What [MBIA is] doing now is going to completely change the profile of the company," he said.
"Moody's assessment of MBIA's current credit profile does not take into account the significant transformation via commutation and put-back settlements under way that will render today's assessments less relevant," Mehta said.

A third analyst was unimpressed with the downgrade but had a different view of MBIA's future. "I think it's irrelevant," said Mort Sullivan, vice president of municipal management at Glickenhaus & Co. "They've been insolvent for years. I think the ratings are still too high. … I think it's in run-off."

Sullivan said he saw no chance that NPFG would come back to insure new municipal bonds.
On Tuesday, MBIA Inc.'s stock lost 41 cents, or 3.4% of its value, and closed at $11.51.
Standard & Poor's gives NPFG a 'BBB'.

MBIA declined to comment for this story.

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