Based on its expectation that Financial Guaranty Insurance Corp. (FGIC) will experience further credit deterioration on its book of business backed by residential mortgage-backed securities, Fitch Ratings this morning dropped its insurer financial strength rating on the company to 'CCC' from 'BBB'. The rating was also placed on evolving watch.

Fitch dropped its rating on the parent company, FGIC Corp. to CCC-minus from BB and placed the rating on negative watch.

Fitch said the deterioration could lead to further additions in loss reserves which will increase the possibility that FGIC could become subjected to some form of regulatory intervention.

Moreover, Fitch said that as of March 31, 2008 FGIC would have negative statutory capital if not for the $600 million “contingent gain” the company recognized related to an SF CDO transaction, known as Havenrock II, that is currently being disputed in court. Fitch continues to monitor developments with respect to this dispute for potential implications to the financial condition of FGIC.

The downgrade comes slightly more than a month after Moody’s Investors Service dropped FGIC to B1 with a negative outlook, and put the parent’s rating at Caa2.
In early June, Standard & Poor’s placed its 'BB' rating on FGIC on negative watch citing concerns regarding the magnitude of projected RMBS and related collateralized debt obligation losses when compared with the company’s claims-paying resources.

Fitch's action on FGIC comes two days after Fitch downgraded XL Capital Assurance  to 'CCC' from 'BB' one day after the bond insurer's parent, Security Capital Assurance, announced agreements with XL Capital. and Merrill Lynch, that will enhance its solvency thanks to a capital infusion and the termination of credit default swaps and other policies. Fitch placed the rating on evolving watch.

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