Update 1: Reflects Fitch’s correction of new IFS rating. Fitch Ratings said late Thursday that it had downgraded mortgage insurer MGIC Investment Corp. (MTG), citing ongoing “capital constraints” and increased likelihood of losses as the U.S. residential housing sector continues to sour. MGIC saw its insurer financial strength rating downgrade to ‘BB,’ which is still an investment grade rating. “In addition to limited capital markets access, MGIC has few remaining assets that could be monetized to increase its capital resources (as the company did in 2008 with the sale of its interest in Sherman Financial LLC) and will largely have to rely on current capital resources to satisfy ongoing MI claims,” the rating agency said in a press statement. Fitch said it maintained an investment grade rating on MGIC because of “substantial capital resources.” The insurer and its operating subsidiaries hold an $8.1 billion investment portfolio, $3.7 billion of statutory capital and $4.5 billion of statutory loss reserves in support of the company’s $54.5 billion of risk-in-force. In particular, Fitch said that it had concerns around certain covenants in MGIC’s credit facility, which has $200 million outstanding. “Given the current operating environment and MGIC’s operating results, there is a high likelihood that MGIC would need to repay or restructure the credit facility prior to maturity in order to avoid breaching the facility’s leverage (risk-in-force to capital) and other financial covenants,” Fitch noted. A default under the bank facility would trigger a cross default of MGIC’s $500 million of senior debt outstanding. MGIC maintains approximately $394 million of funds at the holding company, Fitch said. MGIC said on Mar. 13 that it would defer interest payments on $390 million in junior subordinated debt, in a filing with the Securities and Exchange Commission, as part of an effort to preserve capital. Fitch said it expected the MI industry as a whole, and not just MGIC, to continue to face challenges such as rising unemployment, home price depreciation, and limited refinancing opportunities. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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