Fitch Ratings Monday downgraded bond insurer Financial Security Assurance (FSA) to 'AA'-plus from 'AAA'. The ratings remain on rating watch negative.

Fitch said the downgrade “primarily reflects Fitch’s view of the residual risks retained by FSA following the transfer of its financial products business to Dexia.” Assured plans to acquire FSA parent Financial Security Assurance Holdings from Dexia, excluding the financial products business.

Dexia and the Belgian (rated 'AA'-plus) and French (rated 'AAA') governments have agreed to take on any risks remaining in the financial products portfolio. Because the government guarantees are a large part of the risk protection, FSA’s rating is effectively capped at 'AA'-plus until the business substantially runs off.

Fitch said FSA remains well-capitalized and that the acquisition will likely be accretive for the combined firms.

Both FSA and Assured Guaranty Corp., which Fitch downgraded to 'AA' last week, will see their rating watches resolved when “the transaction has closed and there is greater clarity with respect to the combined company’s business strategy and capital management plans, as well as developments in the markets for financial guaranty insurance.” It said the rating of FSA “would be unlikely to fall below AA” if downgraded.

“We want to underscore that Fitch’s downgrade of FSA to AA-plus results from its capping FSA’s rating at a level consistent with the Belgian sovereign guarantee provided in the structure for transferring the FP business to Dexia,” FSA chairman and chief executive Robert P. Cochran said. “Once the planned acquisition of FSA is complete, FSA will be well capitalized and strongly protected from the financial products exposure, which is now approximately $13 billion and will diminish substantially over the next several years.”

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