Moody's Investors Service downgraded the insurance financial strength ratings of CIFG Guaranty, CIFG Europe, and CIFG Assurance North America, collectively known as CIFG, to 'Ba2' from 'A1'. The rating agency kept the ratings under review with direction uncertain.
Moody's said that the rating actions reflect the high probability that, without material developments, the insurance firm will likely fail the minimum regulatory capital requirements in New York and Bermuda. This is a result of the expected significant rise in modeled loss reserves on ABS CDOs.
The breach of these regulatory capital requirements would put CIFG in a "precarious" position, particularly because of the solvency provisions embedded in its CDS exposures. The review with direction uncertain reflects potential changes in the credit profile of the bond insurer that could happen in the next couple of months as CIFG attempts to implement capital strengthening plans.
Moody's ratings on securities that are guaranteed or "wrapped" by a financial guarantor are usually maintained at a level equal to the higher of the rating of the guarantor or the published underlying rating.
However, as CIFG's rating has been downgraded to below the investment grade level. Reflecting current rating agency policy, Moody's will withdraw ratings on CIFG-wrapped securities for which there is no published underlying rating.
According to the rating agency, if the guarantor's rating is moved back into the investment grade range, or if the agency publishes the underlying rating, Moody's would reinstate the rating to the wrapped instruments.