Investors Relieved as Bond Insurer MBIA Keeps Top Credit Ratings

February 26, 2008

MBIA Inc., the world’s largest bond insurer, held onto its top credit ratings from Standard & Poor’s Monday, in a development that soothed stock and bond investors fearing downgrades would roil capital markets.

Standard & Poor’s said it had grown more confident that MBIA could raise capital after the insurer sold some $2.6 billion of debt and equity in the first two months of 2008.

But the outlook for MBIA’s ratings over the next six months to two years remained negative because of the size of potential losses compared with the insurer’s capital cushion, S&P said.

U.S. stocks surged after the report, but the bond insurance crisis is far from over. The main unit at Ambac, the second largest bond insurer, may still lose its top ratings, S&P said, and a source said a deal to provide the insurer with more capital will not likely be signed until early next week.

Bond insurers are expected to make big payouts in coming years after guaranteeing repackaged subprime mortgage bonds and other risky debt. Market participants cannot easily estimate how big losses will be for the insurers, which guarantee more than $2.4 trillion of securities.

Difficulty in nailing down the size of expected losses makes it hard to determine how much capital the insurers need long-term.

Ambac is expected to raise about $3 billion in a deal it is working out with banks, regulators, and other parties, a person familiar with the matter said. That would be more than enough to cover the $400 million shortfall that S&P sees for the insurer now. Even if Ambac is unable to complete the deal, other moves like buying reinsurance could eliminate the shortfall, the rating agency said.

Holding onto top credit ratings is crucial for bond insurers, which guarantee municipal bonds as well as repackaged debt like subprime mortgage bonds against default. If a bond insurer loses its top ratings, the bonds it guarantees are usually downgraded as well.

Investors that can only hold top-rated instruments would have to sell billions of dollars of securities, lifting borrowing costs for cities and consumers and triggering big losses for banks.

Oppenheimer & Co analyst Meredith Whitney estimated last month that banks could write down $70 billion from their exposure to Ambac, MBIA, and ACA Capital Holdings.

Hopes that investors would not have to dump MBIA-insured bonds lifted the stock market, with the Standard & Poor’s 500 index ending up 1.38 percent at 1,371.80 on Monday. As stocks rose, prices for Treasury bonds, which are seen as safe investments, fell.

Shares of bond insurers surged on hopes the companies were further along in fixing their problems. MBIA closed up 19.7 percent, or $2.40, at $14.58, while Ambac rose 15.9 percent, or $1.70, to $12.41. Both trade on the New York Stock Exchange.

(Reporting by Dan Wilchins; Editing by Jonathan Oatis)

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