After missing a deadline to raise capital, the world’s fourth-largest bond insurer, Financial Guaranty Insurance Co., had its AAA credit rating cut to AA at Fitch Ratings.
The insurance unit’s top rating was placed under review by Fitch, Moody’s and S&P in December after downgrades of securities backed by subprime mortgages. Fitch gave the company until this week to boost capital by $1 billion.
According to the company’s website, about 23 percent of FGIC’s guarantees are on structured finance, 71 percent are on municipal bonds, and 6 percent are on international transactions. FGIC guaranteed $8.8 billion of subprime mortgage debt, $21 billion of home-equity securities, and $10.3 billion of CDOs backed by subprime mortgages and other loans.
The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company’s ability to generate new business. FGIC, together with MBIA Inc. and Ambac Financial Group Inc., are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier collateralized debt obligations (CDO), subprime mortgages and home- equity loans .
The once unquestioned strength of AAA rated bond insurers are being reassessed on concern by Fitch, Moody’s and S&P that they don’t have enough capital to cover losses stemming from downgrades on securities they guarantee. Fitch this month also cut Ambac to AA from AAA and sliced Security Capital Assurance Ltd. five levels to A.
CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities, have accounted for the biggest portion of the more than $133 billion in writedowns since the third quarter at the world’s biggest financial institutions.
Until now, the financial institutions have a portion of their subprime losses hedged by insurance policies with these bond insurers. If the credit ratings of these insurers are affected, then they might need to sell off some of their CDOs holdings at current distressed prices or even write down their losses even more.
Amist all these turmoil, Warren Buffett’s newly setup bond insurance company is proceeding with a nationwide license application to all 50 states to sell bond insurance.