Fitch Downgrades MBIA to AA

Readers may recall that MBIA tried the “just say no” strategy with rating agency Fitch, trying to shut out the number three firm, obviously due to its less than charitable view of the industry (Fitch downgraded Ambac to AA while Moody’s and Standard & Poor’s maintained the sham of a top grade). MBIA requested that Fitch cease publishing ratings and return information previously provided it.

We had observed that this move by MBIA was great PR for Fitch and the firm would be well served to continue to rate MBIA. While Fitch is at a disadvantage by no longer having access to management, the business can’t have changed much in a mere month. And Congressional pressure for bond arbiters to rate municipalities on the same grading scale as coporates was a death warrant to bond guarantors, eliminating their historical free lunch low risk business.

Conventional wisdom when the bond insurer crisis was put in abeyance by the affirmation of MBIA’s and Ambac’s AAAs by both agencies for at least three, hopefully six months. This may move monoline worries back to the front burner.

From Reuters:

MBIA Inc’s insurance arm on Friday lost its top rating from Fitch Ratings, which also cut the parent company’s ratings due to capital adequacy concerns.

MBIA Insurance Corp, the insurance arm of the world’s biggest bond insurer, saw its ratings fall to “AA,” the third highest, from a top rating of “AAA.” Fitch also cut the parent company by three notches to “A,” the sixth highest, from “AA.”

MBIA shares fell 4.5 percent to trade at $13.65 after the rating cuts.

“The market is already somewhat discounting the value of the franchise,” said Evan Rourke, portfolio manager with M.D. Sass in New York.

Tom Spalding, portfolio manager at Nuveen Investments in Chicago, said prices of municipal bonds insured by MBIA are unlikely to cheapen after the Fitch downgrade but price improvement will slow.

“Retail will still buy MBIA insurance, but I don’t think institutions are going to be quite as aggressive,” Spalding said.

Prices of MBIA-insured munis have been edging higher since Standard & Poor’s and Moody’s Investors Service affirmed the guarantor’s triple-A rating, Spalding said.

Some municipal issuers started using MBIA again because rival Financial Security Assurance, owned by Dexia, which boasts untainted top ratings from three agencies, has gotten too expensive, Spalding said….

“Fitch does not believe it will be possible for MBIA to significantly improve its credit profile until the company can more fully reestablish momentum in the financial guaranty market, especially in the core U.S. municipal finance sector,” Fitch said in a statement.

Additional detail from Bloomberg:

Fitch Ratings cut MBIA Inc.’s insurance rating to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking….

“It will be difficult for MBIA to stabilize its credit trend until the company can more effectively limit the downside risk” from collateralized debt obligations, Fitch said in the report….

MBIA’s suspension of its structured finance business, which includes CDOs and asset-backed securities, may help to boost the company’s rating back to AAA in the future, Fitch said today.

MBIA will have losses on CDOs backed by subprime mortgages of as much as $4.9 billion after taking into account that they will be paid over time, Fitch said.

The analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those originated in 2007 will lose 26 percent, Fitch said.