Security Capital Cut to Junk by Fitch

Beleaguered bond insurer Security Capital Assurance Ltd saw Fitch drop a core credit rating to junk status on Wednesday afternoon, a move that may further push the monoline’s future into doubt. Fitch cut SCA’s long-term issuer rating to ‘B-‘ from ‘BBB,’ while also further downgrading the insurer financial strength ratings of SCA’s primary insurance subsidiaries to ‘BB’ from a prior rating of ‘A.’ Investors will likely be foreced to further mark down their RMBS and CDO holdings that include a guaranty issued by the monoline, as a result. Security Capital’s two primary subsidiaries are XL Capital Assurance Inc., a monoline financial guarantee insurance provider, and XL Financial Assurance Ltd., a monoline provider of reinsurance to financial guarantee insurers. Fitch had originally cut its AAA-rating on XLCA in January. Fitch cited “material erosion in SCA’s franchise value and competitive business position” as the core driver for the downgrades, and said that losses on SCA’s structured finance collateralized debt obligations (SF CDO) backed by subprime RMBS will ultimately fall within a range of about $3 to $4 billion. The downgrade does not represent an immediate liquidity concern, the agency said, as SCA’s modeled claims paying resources and committed external reinsurance coverage amounted $4.2 billion as of the end of last year. Nonetheless, Fitch said that its estimate of losses relative to available capital was no longer consistent with an investment-grade rating, and said that SCA was $5.6 to $5.9 billion short of qualifying for a AAA rating. The insurer would need at least another $600 million in capital to qualify for Fitch’s lowest investment-grade rating. SCA said in a seperate press statement that is was “disappointed” with Fitch’s rating action (what, you thought they’d be pleased?), and that the agency likely employed “significantly different assumptions” in their analysis of SCA’s CDO portfolio than the company did in performing its own risk analsyis. SCA also followed the lead of other major monoline insurers of late, and piled onto Fitch’s status as the third major rating agency, saying that it had only publicly rated three of SCA’s 25 insured CDO of ABS deals. The company said its own analysis — which it characterized as “comprehensive” and “bottom up” — led it to establish case loss provisions totaling $838.6 million before reinsurance, and $651.5 million after reinsurance in the fourth quarter of last year. The question is: who should investors now believe? On that front, it would appear the answer is Fitch: shares in SCA were trading down nearly 11 percent in morning activity on the NYSE, at $0.61/share. For more information, visit http://www.fitchratings.com and http://www.scafg.com.