Moody’s Investors Service downgraded bond insurer Assured Guaranty Corp. (AGC) one notch to 'Aa3' from 'Aa2' late Thursday, but Assured Guaranty Municipal Corp. (AG Municipal) formerly Financial Security Assurance, retained its 'Aa3' rating.
AGC remains under review for downgrade, while AG Municipal’s outlook was changed to negative. The two companies are owned by the same parent — Assured Guaranty — but operate independently. Together they dominate the bond insurance market, and with Moody’s decision neither has a core rating advantage over the other.
Regarding AGC, analysts from Moody’s said that the company “has suffered the most significant deterioration in relation to its $2.7 billion in reported claims-paying resources as a result of stress in its RMBS and CDO portfolios.”
Moody’s also said that “capital strengthening initiatives under consideration by the group could result in a conclusion of the rating review with a confirmation at the 'Aa3' rating level, negative outlook, if fully implemented.” Absent such initiatives, the agency said it would expect to lower AGC’s rating into the single-A range.
For AG Municipal, Moody’s said the $7.3 billion of reported claims-paying resources was adequate capitalization for its current rating, but it noted “meaningful uncertainty” in the insured portfolio.
Despite Moody’s concerns over “significant deterioration” in AGC’s claims-paying capital, stock in the insurers’ parent company, Assured Guaranty, jumped 19.7% to $21.66 on Friday.
“It sounds like this is a big relief to the market,” said Fred Yosca, manager of underwriting and trading at BNY Mellon Capital Markets. “If they had downgraded AGC to below 'Aa3', then that would bode pretty poorly for AG Municipal also.”
The reaction from Assured was equally benign.
“We are pleased to be rated in the double-A category,” said Sean W. McCarthy, president and chief operating officer of Assured Guaranty U.S. Holdings. “We would like to have the highest ratings possible, and though we believe our ratings should be higher, I’d point out that we’re the first companies to have maintained double-A ratings through this crisis.”
“Moody’s view of the performance of our mortgage portfolio is extremely pessimistic,” McCarthy said, but “we are going to implement capital initiatives to stabilize our 'AA' ratings.”
Last Tuesday Assured released a preliminary earnings statement suggesting a net loss in the third quarter of approximately $35.0 million, or 22 cents per share. Official earnings will be released today.