MBIA could be exposed to credit loss in several deals it wrapped for Student Finance Corp., should multi-line insurance company Royal Indemnity successfully rescind the policies it wrote on several hundred million dollars worth of loans. In a suit filed by MBIA and deal trustee Wells Fargo against Royal's rescission, the surety claims that 70% of the portfolio will be in default if Royal Indemnity wipes its hands clean. MBIA is guarantying full payment on eight SFC securitizations issued over the last two years, with about $400 million outstanding.

MBIA intends to honor its wrap, according to a prepared statement from Chairman Jay Brown, even if Royal successfully dodges its own obligations. In comments released by Moody's Investors Service, the agency affirmed its rating at triple-A rated

"MBIA's commitment to honor its obligations under its financial guaranty policies stands in sharp contrast to Royal Indemnity's attempt to rescind its policies," the rating agency added.

Student Finance Corp. is a Texas-based originator of loans to vocational students. Royal Indemnity, which is a subsidiary of U.K.-based Royal & Sun Alliance, claims that SFC was fraudulent in the representation of the loans when the insurance policies were written. In June, claims nearing $270 million were submitted to Royal, and shortly thereafter the company filed, in a Texas court, to rescind its policies.

MBIA, which filed suit against Royal in Delaware federal district court, is confident that Royal will be made to honor its policies. The potential cash loss to MBIA, though steep, would not significantly impact the surety's financial strength - certainly not threatening its triple-A rating, Moody's said.

It just goes to show

Regardless of the outcome, the incident furthers the uncertainty market players have expressed towards multi-line insurance companies writing financial guaranties, as multi-lines have shown their willingness to walk away from obligations in the past. Unlike the monolines, which would be shut out of the business if they disappoint investors, the multi-lines have other channels of business and are not under the same constraints.

Still, some have argued AIG Credit is all but barred from the securitization market because Lexington Insurance Corp. backed out of an obligation to cover shortfalls in certain Hollywood Funding film receivable deals. Both AIG and Lexington are subsidiaries of American International Group. For the second year in a row, AIG has pulled its insurance premium financing deal from the market, reportedly due to a lack of interest from the buyside (see ASR 7/8).

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