Moody’s Investors Service yesterday downgraded to 'Aa3' from 'Aaa' the insurance financial strength ratings of Ambac Assurance Corp., Ambac Assurance U.K.  and the debt ratings of Ambac Financial Group and related financing trusts. The rating actions come after a review for possible downgrade that was initiated by the agency on June 4.

According to Moody’s, the action reflects the Ambac's significantly constrained new business prospects, its impaired financial flexibility and increased expected and stress loss projections. The outlook for the ratings is negative, reflecting uncertainties regarding the company’s strategic plans. As a result, the Ambac-wrapped securities rated by Moody’s are also downgraded to 'Aa3' except for those with higher public underlying ratings.

Moody's also downgraded to 'A2' from 'Aaa' the insurance financial strength ratings of MBIA Insurance Corp. and its affiliated insurance operating companies. At the same time, it also lowered the surplus note rating of MBIA Insurance Corp. to 'Baa1' from 'Aa2' and the senior debt rating of the holding company, MBIA  to 'Baa2' from 'Aa3'. The downgrades mainly reflect MBIA’s limited financial flexibility and impaired franchise as well as the substantial risk within its portfolio of insured exposures, said the agency. As a result of the rating actions, securities wrapped by MBIA and rated by Moody’s are also downgraded to 'A2'.

Separately, Standard & Poor's earlier this month placed 111 tranche ratings from European corporate synthetic CDOs on CreditWatch negative.  The agency said that the CreditWatch negative placements on the CDO tranches are due to negative rating migration in their portfolios due, but not limited, to the rating actions on the monolines. Due to the portfolio negative migration the SROC ratios of these tranches has dropped below 100%.

In total, 1017 European synthetic CDO transactions have exposure to at least one affected monoline. According to S&P, the number of European deals referencing the ‘affected’ monolines are: 969 tied to MBIA, 829 tied to Ambac, 695 to XL Capital, and 132 to FGIC. The majority of these deals have more than one of the affected monolines referenced in their portfolio. Of these transactions, 119 reference three monolines, 302 are tied to two monolines and 114 are tied to one monoline.


"No indication has been given in respect to the potential number of downgrades, and it’s hard to estimate given the many factors at play, namely how many monolines in the portfolio and which, how much excess credit enhancement in the tranche, deal maturity, deal seasoning, etc,"  Royal Bank of Scotland analysts said. "Further, yesterday's downgrade of Ambac and MBIA by Moody’s Investors Service though not a direct input in S&P’s rating process does add to the negative background (e.g. the prospect of further rating actions on the monolines may have to be subjectively factored in)."

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