S&P Bond Insurer Ratings Overhaul May Cause Downgrades

Monday, 24 Jan 2011 02:15 PM

 

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Standard & Poor’s is proposing changes to the way it rates bond insurers that may prompt downgrades of guarantors with the highest rankings.

Insurers with investment-grade ratings would face cuts of one or more grades if the criteria were adopted unless they raise capital or reduce risk, the New York-based firm said in a statement today.

S&P stripped the lone active municipal bond insurer, New York-based Assured Guaranty Ltd., of the industry’s last top AAA ranking in October, while saying investors and issuers are weaning themselves from the guarantees such insurers offer. The ratings firm didn’t name Assured or any other insurer in the statement today.

“If we adopt the proposed criteria, we will significantly change our rating methodology for bond insurers,” S&P said in the statement. “Along with increased transparency, this will enhance the comparability of our ratings by helping market participants rank the creditworthiness of bond insurers relative to issuers in other sectors.”

New sector stress tests and liquidity tests will be added to the criteria, as well as “weak link filters” that identify liquidity or leverage issues that may constrain a company’s rating, S&P said. The amount of capital needed to win “high investment-grade ratings will increase significantly under the proposed criteria because of higher capital charges used in scoring capital and the new leverage test,” according to S&P.

Planned Teleconference

The company said it published a request for comment on the proposal and is accepting responses through March 25. It also is planning a teleconference for Feb. 2 at 11 a.m. New York time to discuss the plan.

Betsy Castenir, a spokeswoman for New York-based Assured, declined to immediately comment. Chief Executive Officer Dominic Frederico in November called S&P’s decision to strip the insurer of its AAA rating “unwarranted” and apparently based on a “truly unimaginable” scenario.

S&P cut its financial strength and counterparty credit rating on Assured Guaranty Corp. and Assured Guaranty Municipal Corp. one level to AA-plus.

Assured fell to the lowest since Aug. 31 after S&P’s announcement, declining $1.07 cents, or 6.3 percent, to $15.99 as of 1:40 p.m. in New York Stock Exchange composite trading.

MBIA Inc.’s National Public Finance Guarantee Corp., the municipal bond insurer it created in a split from its structured finance guarantee business in 2009, is rated BBB by Standard & Poor’s, the lowest tier of investment grade. MBIA fell 22 cents, or 1.8 percent, to $12.29.

Berkshire Hathaway Inc., which entered the market guaranteeing municipal bonds in late 2007, backed off after Chairman Warren Buffett told investors in February 2009 that insuring the debt appeared to have become “a dangerous business.”

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