Standard & Poor's reaffirmed the Triple A rating on the two biggest bond insurers, MBIA and Ambac Financial Group, sparking a rally by both stocks and the market in general.
S&P ended its downgrade review for MBIA's Triple A rating, citing success by the largest U.S. bond insurer in raising new capital.
The action reflects the company's ability to successfully access $2.6 billion in extra capital that can be used to pay claims, S&P said in a statement.
The outlook is negative, indicating a rating cut may still be likely over the next two years.
The "AAA" ratings of Ambac were affirmed but remain on review for downgrade. A group of banks has largely finalized a deal to recapitalize Ambac and is now trying to sell the plan to the rating agencies to save Ambac's triple-A rating, CNBC has learned.
S&P's affirming of Ambac doesn't take into account the recapitalization plan, but the review will continue until details of the plan are clearer.
A tentative structure for up to $3 billion in capital for Ambac has been agreed to by the consortium, which includes Citigroup and Wachovia. The banks are trying to save Ambac, as well as other bond insurers, because a ratings downgrade could force the banks to write down billions more of their own debt.
It's unclear exactly when the deal will be announced officially, but it will hinge on getting the rating agencies to sign off on it, so it could be later this week or early next week.
Though the structure of the deal is largely finalized, rating agency approval is crucial because bankers want to make sure that Ambac isn't downgraded after they put money into the bond insurer.
Bankers and New York insurance regulators are still confident the deal will get done, but caution that it could blow up at any time depending on the what the rating agencies decide.