Fitch Ratings has downgraded the Insurer Financial Strength (IFS) ratings of CIFG Guaranty (CIFG) and its affiliates to 'CCC' from 'A-'.
The affected units are: CIFG Guaranty, CIFG Assurance North America and CIFG Europe. The rating agency has also placed the ratings on Rating Watch Evolving.
The downgrade is partly based, on recent conversations with CIFG's management, in which the company has said that it could be at greater risk of falling below regulatory minimum capital requirements, if the firm's loss provisions rise,which might trigger an insolvency proceeding by regulators.
If this were to happen, Fitch said that CIFG's whole $57 billion CDS portfolio, which is the main form of execution for the insurance firm's entire CDO exposure (including investment grade corporate, high-yield corporate, and structured finance CDOs) would be subject to termination at current valuations.
According to Fitch, based on current market valuations, analysts do not think CIFG would have enough claims-paying resources to meet these obligations, triggering a probable default of its insurance subsidiaries. The insurer is actively working to remediate these risks and if it is successful, the company's capital position and policyholders' prospects could considerably improve, Fitch said.
The rating agency's IFS rating downgrade to 'CCC' reflects the weakness of CIFG's current financial position and indicate two possible conditions, consistent with Fitch's definition of a 'CCC' IFS rating.
Although obligations are still being met on a timely manner, there is a real
chance that ceased or interrupted payments could happen in the future due to the possible termination of CIFG's CDS exposures at current valuations, the rating agency said.
Fitch thinks the capacity for continued timely payments is dependent on the successful remediation through commutation of the company's SF CDO exposures.