Fitch Ratings said Thursday that it has placed numerous ratings of MBIA Inc. on negative watch, including its ‘AAA’ insurer financial strength (IFS) rating. The move comes on the heels of a disclosure late Wednesday by the world’s largest bond guarantor that it maintains a $30.6 billion exposure to the CDO market, including substantial exposure to CDOs squared — esoteric bonds, often tied to subprime mortgages, that in many cases have rapidly declined in value as underlying assets have seen losses accelerate. Fitch said that MBIA’s capital ratio falls below current guidelines needed to maintain a ‘AAA’ IFS rating, and that MBIA would need to raise an addtional $1 billion in capital during the next four to six weeks in order to maintain its rating. According to a statement released by the rating agency, the capital shortfall is the result of downgrades to CDO issuances insured by MBIA, combined with what Fitch said was “noticeable deterioration in the company’s RMBS portfolio, including prime second-lien mortgage securitizations.” MBIA’s RMBS portfolio totaled $22.8 billion at the end of September. A ratings downgrade at MBIA would be a dire outcome for the mortgage industry; Fitch noted that if MBIA cannot raise the required capital, it would likely downgrade the guarantor’s IFS rating to ‘AA+.’ From the press statement:
Fitch’s rating assessments indicate that a number of MBIA’s insured SF CDOs and CDO-squareds would now be rated well below the ‘AAA’ rating category, with a number of transactions falling to the ‘BBB’ or non-investment grade rating categories. … Fitch has also factored in existing deterioration that has taken place or is expected to take place in MBIA’s RMBS portfolio, with special emphasis on prime second-lien mortgage securitizations, the majority of which have been underwritten since the beginning of 2005, and were often done at ‘BBB’ and ‘BBB-‘ attachment points. As a result of deterioration in a number of these second-lien transactions, MBIA announced last week that it was setting aside reserves of up to $500-$800 million against future claims that are expected to be realized.
MBIA has long enjoyed a reputation as the most conservative underwriter in the ABS market, something that today’s news has clearly shattered. Fitch noted in its analysis that “it appears that more recently MBIA began to get more competitive in the sectors suffering material credit deterioration, and it is many of these transactions that are causing the problems for the company today.” The guarantor recently obtained a $1 billion capital commitment from private equity firm Warburg Pincus, and Fitch noted that the investment “will likely increase MBIA’s flexibility to engage in other capital enhancement measures in the weeks ahead.” We’d all better hope so: as a result of it’s now-precarious ratings position, Fitch said it had placed a whopping 173,022 bond issues (172,860 municipal, 162 non-municipal) insured by MBIA on rating watch negative. All I can say is: systemic risk, meet the mortgage mess.
