Capital Markets

How Much Pain Can a Downgrade Cause? $7.4B at MBIA

Payments are required after Moody's action on the troubled company's asset/liability management business.
Stephen TaubJune 23, 2008

The severity of the impact on MBIA Inc. of a Moody’s downgrade continues to ripple through Wall Street. The hit from the downgrade of MBIA’s insurance financial strength rating from Aaa to A2 on the MBIA asset/liability management (ALM) business, according to MBIA, will be $7.4 billion.

In a brief statement, the company said that it expects $2.9 billion to be required to satisfy potential termination payments under Guaranteed Investment Contracts (GICs). In addition, MBIA expects to be required to post about $4.5 billion in eligible collateral to satisfy potential collateral posting requirements under GIC’s as a result of the downgrade. In an earlier reaction, Moody’s had said: “We have more than sufficient liquid assets to meet any additional requirements arising from any terminations or collateral posting requirements.”

“MBIA is leveraged through their own rating and that can make a downgrade very harsh,” Matt Fabian, a senior analyst with Municipal Market Advisors, told Bloomberg News. “It’s very hard for an outsider to piece together the impact of these downgrades.”

On Friday, Moody’s downgraded bond insurers MBIA as well as Ambac.

MBIA said that it has total assets of $25 billion related to its ALM business, of which $15.2 billion is available to satisfy these requirements. This includes about $4 billion in cash and liquid short-term investments; $1 billion of unpledged eligible collateral on hand; and roughly $10.2 billion of other unpledged diversified securities with an average rating of Double-A. In addition, MBIA said it has available another $1.4 billion in cash, including the proceeds of its recent equity offering.

In its report on MBIA, the credit-rating agency said the downgrade “reflects MBIA’s limited financial flexibility and impaired franchise, as well as the substantial risk within its portfolio of insured exposures and a movement toward more aggressive capital management within the group.” Moody’s said that while the group remains strongly capitalized, estimated to be consistent with a Aa level rating, and benefits from substantial embedded earnings in its existing insurance portfolio, these other business factors led to the lower rating outcome. MBIA’s insured portfolio also remains vulnerable to further economic deterioration, particularly given the leverage contained in its sizable portfolio of resecuritization transactions, including some commercial real estate CDOs,” Moody’s said.

The report added that the outlook for the ratings is negative, reflecting the material uncertainty about the firm’s strategy and the “non-negligible likelihood of further adverse developments in its insurance portfolios or operations.” Moody’s also said that substantial uncertainty about the ultimate performance of MBIA’s mortgage related exposures continues to adversely affect market perceptions of the firm, greatly impairing its financial flexibility and ability to write new insurance. It noted that MBIA has recorded approximately $2.1 billion in cumulative loss reserves and impairments associated with its mortgage related portfolio, mostly from second lien mortgage backed securities and asset-backed CDOs .

Moody’s noted that, over the last few months, MBIA has written little new business, and its financial flexibility has deteriorated substantially as evidenced by the significant decline in the company’s stock price and high current spreads on its debt securities, making it extremely difficult to economically address potential capital shortfalls should markets continue to worsen.

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