MBIA, Ambac May Have Ratings Cut by Moody's

Moody's Investors Service said it's likely to cut the top ratings of the bond insurance arms of MBIA and Ambac Financial, on concerns about mortgage-related losses and limited new business prospects.

Credit Crunch
Credit Crunch

Shares of both companies tumbled more than 15 percent on the action.

The ratings on MBIA Insurance and Ambac Assurance are likely to be cut to the "Aa" level, which would be one to three notches lower than its current "Aaa" rating, though a drop to the "A" area is also possible, Moody's said.

It cited growing concerns that losses from residential mortgage-backed debt will be higher than expected and significantly constrained prospects for new business as reasons for the action.

MBIA and Ambac are also hampered from raising new capital, as their market capitalization has plunged and their cost of accessing the debt markets is very high, Moody's said.

In a statement, the company said it disagreed with Moody's move and had believed that the ratings agency would hold off on any changes for six to 12 months unless MBIA's position "changed materially."

"Since then, there have been no material adverse changes in the environment, and we believe our capital position has improved," the statement said.

Speaking during a conference call, MBIA Chief Executive Officer Jay Brown pointed out the subjectivity of the Moody's ranking system.

"We have a lot of dialogue with Moody's...I think there's a misperception out there that they give you a formula...It's much more subjective than that," he said.

"We're dealing with a very high standard, a triple-A standard...Moody's could wake up some morning and just put the bar so high for triple-A that no one could reach it in the financial guarantee business," Brown added. "Moody's is struggling to understand what is happening in all of the credit markets—and they have missed some calls—as have we."

MBIA is the world's largest bond insurer, guaranteeing $668 billion in debt as of the end of the first quarter of 2008, while Ambac is the second largest insurer, with an insurance portfolio of $511 billion.

The ratings of assets insured by the companies, which includes municipal debt, are also likely to be cut, except when the rating of the underlying asset is higher than that of the insurers.

Moody's had initially placed both companies' top ratings on review for downgrade in January, but affirmed MBIA in February and Ambac in March.