Standard & Poor's has lowered its counterparty credit, financial strength, and financial enhancement ratings on MBIA Insurance Corp. (MBIA) to 'BBB+' from 'AA'. The outlook on MBIA is negative, according to a release from S&P.

S&P also said that it lowered its counterparty credit and financial strength ratings on MBIA Insurance Corp. of Illinois (MBIA Ill.) to 'AA-' from 'AA' and placed them on CreditWatch with developing implications.

The rating agency also lowered its counterparty credit rating on MBIA, the group holding company, to 'BB+' from 'A-'. The outlook on the holding company is negative.

Additionally, S&P lowered its counterparty credit and financial strength ratings on Municipal Bond Insurance Assn. to 'AA-' from 'AA' and placed the ratings on CreditWatch developing. This rating action mirrors the action taken on MBIA Ill. The association is supported by surety bonds of around $340 million from MBIA Ill., which exceeds the outstanding insured par.

The agency's actions come after MBIA's announced restructuring where MBIA Ill became a sister firm of MBIA. The bond insurer's management has stated that MBIA Ill. is now the public finance insurer within the group and has assumed the U.S. public finance book of business from MBIA on a reinsurance-cut-through basis.

Business recently ceded to MBIA from Financial Guaranty Insurance Co. or FGIC has also been assigned to MBIA Ill. MBIA is has the global structured finance and international infrastructure business. This restructuring separates the more volatile structured finance book of business from the lower-risk public finance book.

Operational functions at MBIA Ill. will benefit from the stability and continuity of a staff consisting largely of individuals from MBIA who were responsible for the business, underwriting, and risk management of its solidly investment-grade public finance book of business.

"The downgrade of MBIA Ill. reflects our view of both its uncertain business prospects and its capital, which is marginally below our 'AA' standard," explained Standard & Poor's credit analyst David Veno. "Management's stated goals are to raise additional capital to bolster MBIA Ill.'s current resources, adopt by-laws and governance practices, and effectively ring-fence MBIA Ill. from MBIA and its more volatile book of business. To facilitate this, the company has established an intermediate holding company between MBIA Ill. and the ultimate holding company, MBIA."

According to S&P, from a future business production perspective, the rating agency thinks that MBIA Ill.'s competitive position might take a hit from legacy MBIA performance. There is also uncertainty around investors' acceptance of the restructuring and ring-fencing plan.

S&P downgraded MBIA because of its view that its retained insured portfolio lacks enough sector diversity and with time could become more concentrated. Additionally, the firm's 2005–2007 vintage direct RMBS, CDO of ABS, and other structured exposures are subject to continued adverse loss development that could erode capital adequacy. Supporting the debt-service needs of the holding company might also place pressure on capital adequacy, S&P said in a release.

The rating agency said that there is a strong incentive for MBIA to maintain an orderly runoff of its book of business to not damage the franchise value of the newly launched public finance only subsidiary. To this end, from a risk-management perspective, the bond insurer's management has said that it will retain enough experienced staff to support surveillance and remediation efforts.

The negative outlook on MBIA reflects S&P's view that adverse loss development on the structured finance book could continue. A revision of the outlook to stable will depend on, among other factors, greater certainty of ultimate potential losses as well as the orderly runoff of the book of business.

"We could raise the rating on MBIA Ill. if it successfully raises capital and credibly ring fences its operations from MBIA," Veno added. "However, any rating action based on these factors would most likely remain within the 'AA' category. If MBIA Ill. is not able to raise capital or if legal challenges impair management's restructuring efforts, we could lower the ratings."

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