Monoline Death Watch: Moody’s Puts MBIA, Ambac on Review for Downgrade

We had said that the melodrama with the big bond insurers MBIA and Ambac early this year had failed to solve their underlying problems and was merely postponing the inevitable by a few months. Readers may recall that an effort by New York insurance superintendent Eric Dinallo to get the monolines to raise substantial amounts of equity fell considerably short of his target, although it did hold off a downgrade by Standard & Poor’s and Moody’s (Fitch did downgrade MBIA to AA in March and had downgraded Ambac in January).

The day of reckoning is approaching. Moody’s not only put the two bond guarantors on review, but said a downgrade was the most likely outcome. One has to wonder if this move was triggered by the gaping (and embarrassing) disparity between Moody’s formal rating and the rating shown in Moody’s newly-established “implied” ratings which reveal what ratings are implicit in market prices for debt, such as credit defaults swaps. Those ratings showed both insurer to be junk credits, a jarring contrast with Moody’s published Aaa mark.

From Bloomberg:

Moody’s Investors Service placed the Aaa insurance ratings of MBIA Inc. and Ambac Financial Corp. under review for a downgrade for the second time this year after the two largest bond insurers reported wider losses from the mortgage-market slump.

MBIA shares tumbled to the lowest since June 1988, Ambac slumped to a new all-time low and credit-default swaps on their debt rose after Moody’s analyst Jack Dorer said a rating cut is “the most likely outcome” of the reviews. Dorer cited the companies’ diminished “new business prospects and financial flexibility” and the likelihood they will report bigger insurance losses…..

“These companies are getting hit from all sides,” said Robert Haines, an analyst with CreditSights Inc., an independent bond research firm in New York. They “aren’t writing new business, they’re going to have more losses and they can’t access the market to replenish capital. How can they be triple-A rated?”….

Credit-default swaps tied to MBIA’s insurance unit rose to a record as investors hedged against the risk the company’s guarantees will sour. Sellers of five-year contracts demanded 23 percent upfront and 5 percent a year, according to CMA Datavision. That’s up from 18.5 percent initially and 5 percent a year yesterday. The upfront cost to protect Ambac guarantees jumped to 24.5 percent from 21.5 percent, CMA prices show.

Note that for CDS trade on an upfront basis when a company is seen at risk of bankruptcy. What is remarkable is the companies’ continued denial. Bloomberg again:

MBIA Chief Executive Officer Jay Brown rebuked Moody’s for its decision and said the review is “unnecessary.” Ambac CEO Michael Callen said the timing was “unfortunate” because the company’s problems are temporary. Armonk, New York-based MBIA and Ambac of New York sold a combined $4.1 billion in shares, bonds and convertible debt to bolster their capital and save their ratings. With their shares down more than 90 percent in the past year and their debt under review, raising more money may not be possible, analysts said…..

“We disagree with Moody’s decision,” MBIA’s Brown, said in a statement today. Moody’s had given MBIA the impression in February that it had 6 to 12 months before the ratings may come under scrutiny. “Since then, there have been no material adverse changes in the environment, and we believe our capital position has improved,” Brown said. “Thus we are surprised by both the timing and direction of this action and can only conclude that the requirements for a Triple-A rating continue to change.”…

Ambac’s Callen said the uncertainty surrounding the company is temporary. “Outside the mortgage-related exposures, the remainder of our portfolio is performing well, and in line with our expectations,” Callen said in a statement. The company has no plans to raise capital, he said.

These comments show either that the CEOs are badly self deluded or incompetent. What the MBIA CEO thinks has no bearing on this process. Has Brown not read a newspaper and seen that the both the housing market and municipal budgets are continuing to deteriorate? Despite the size of his book, he’d like the public to believe that his firm is miraculously untouched. And Callen’s statement “were fine except for mortgages” is laughable. That’s tantamount to saying, “Aside from having terminal cancer, we’re in great health.”

It’s appalling that a Barron’s blog post blames the bond insurers’ tsuris on rating agency downgrades. As we and plenty of others detailed ad nausem in January through March, Moody’s and S&P held off from downgrading the bond guarantors despite considerable evidence that lower marks were warranted. Had the companies made satisfactory responses to critics’ charges (and they certainly had ample time) the rating agencies and more important, the markets, would have seen them in a different light. But during this period, they relied mainly on “those guys are short, why believe them?” and sweeping, unsupported statements, which savvy investors perceive as a lack of a real defense. If the bond insurers really are decent credits, their failure to convince the rating agencies, their own regulators, and the markets otherwise is completely their fault.