Yesterday Moody's Investors Service downgraded to 'Caa2' from 'B3' the insurance financial strength rating of MBIA Insurance Corp., according to a release from the rating agency.
The rating agency also lowered to 'Caa1' from 'B2' the senior debt rating of MBIA Insurance's parent company, MBIA.
The MBIA Insurance rating action concludes a review that started in December 2011. The rating outlooks for both companies are developing.
Today's rating actions have implications for various deals wrapped by MBIA Insurance, the rating agency said.
Moody's ratings on securities that are wrapped by a financial guarantor are generally maintained at a level equal to the higher of the the rating of the guarantor (if rated at the investment grade level)or the published underlying rating.
For structured securities, the treatment will be based on Moody's special comment called Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment Grade (May 2008) as well as the agency's November 10, 2008 announcement entitled Moody's Modifies Approach to Rating Structured Finance Securities Wrapped by Financial Guarantors. For yesterday's MBIA Insurance's rating downgrade, Moody's will adjust the rating of securities it wrapped based on these approaches.
Moody's stated that MBIA Insurance's downgrade reflected a number of factors such as the bond insurer's weak liquidity position. At Sept. 30, MBIA Insurance had roughly $386 million of liquid assets, which the agency considers a modest amount versus the insurer's contingent liabilities.
The rating agency also cited the deterioration of MBIA Insurance's commercial real estate portfolio that can result in meaningful claims in the near future and threaten MBIA Insurance's already strained liquidity.
There is also the likelihood that any global settlement with Bank of America Corp. over outstanding claims would have terms similar to a distressed exchange. The likelihood of a claims payment deferral or other regulatory intervention at MBIA Insurance if a settlement with BofA is not reached and should there be considerable claims.
Last week, BofA announced that it had made a tender offer to purchase at par any and all of MBIA's outstanding senior notes due 2034, Moody's noted. The tender offer comes after MBIA's announcement on Nov. 7 that it would solicit consent from its senior noteholders to amend its debt indentures by substituting its municipal arm National Public Finance Guarantee Corp. for MBIA Insurance in the definitions of "Restricted Subsidiary" and "Principal Subsidiary." These amendments, if approved by over 50% of the noteholders of each series of MBIA notes, would let MBIA avoid a default on its own debt if MBIA Insurance were placed into a rehabilitation or liquidation proceeding. BofA's tender offer on Nov. 13 seeks to obtain ownership of at least 50% of one series of MBIA notes to block MBIA's consent solicitation, Moody's reported.
Moody's said that the developing outlook for MBIA Insurance reflects the considerable uncertainty the firm faces and the potential that a global settlement between MBIA and BofA results in either an improvement or deterioration in the insurer's credit profile.
The rating agency commented that the downgrade of MBIA's senior debt also reflects various factors. This includes the ongoing stress at MBIA Insurance and the risk of claims payment deferral or other regulatory action if MBIA and BofA are not able to reach a global settlement that would leave MBIA solvent.
The rating agency cited the credit linkage between MBIA and MBIA Insurance given the cross default provision in MBIA's senior debt indentures. A rehabilitation proceeding at MBIA Insurance is an event of default, Moody's stated.
The limited liquidity at MBIA versus the chance of debt repayments due under a possible cross default with MBIA Insurance. At Sept. 30, MBIA had $432 million of liquid assets and $897 million of senior notes outstanding.
Moody's also noted BofA's recent tender offer on one class of MBIA's senior bonds which, if successful, can stop MBIA from completing a consent solicitation that would have removed the cross default provision between MBIA Insurance and MBIA.
MBIA's developing outlook is similar to the outlook on MBIA Insurance, which reflects the divergent possibilities for its credit profile over the near-to-medium term, Moody's said.
The insurance financial strength rating of MBIA Mexico, S.A. de C.V. was also downgraded to 'Caa2' (national scale rating of 'Caa2.mx') with a developing outlook. Moody's cited the Mexican unit's reliance on MBIA Insurance's support.