S&P Could Downgrade Bond Insurers

By | January 24, 2011

Standard & Poor’s could downgrade bond insurers by a full category or more if new ratings standards for the sector are implemented and the companies do not raise more capital, the agency said Monday.

Bond insurers’ shares fell sharply, as the prospect of further deep downgrades weighed on an industry already facing challenges writing new business.

S&P said it had proposed a new rating method for bond insurers, aiming to evaluate the companies on nine different criteria it said would be more transparent. The new standard includes a stress test that would factor into the analysis of potential losses on structured finance products.

‘We’ve had ratings transitions that we think we could have done a lot better job with,” said Mark Puccia, the criteria officer in S&P’s global insurance and funds group. ‘We think we can approve the degree of transparency associated with the criteria.”

If the proposal is implemented in its current form, the impact could be substantial.

S&P credit analyst Rodney Clark said investment-grade bond insurers could see their ratings lowered by a full category or more unless they raise more capital or reduce their risk.

That means, for example, that a AA-rated insurer could be cut to A or that a BBB-rated insurer could be cut to junk.

S&P also said the amount of capital a bond insurer would have to have for a high investment-grade rating would increase “significantly” under the new method.

Once S&P finalizes and publishes the new criteria, it could be implemented anywhere from the same day to six months later; Puccia said there was no decision yet on timing.

Shares of bond insurers were broadly lower, with Assured Guaranty Ltd closing 5.8 percent lower and MBIA Inc down 1.9 percent.


According to S&P, the only bond insurers that currently hold an investment-grade rating are three Assured Guaranty units and MBIA’s National Public Finance business.

‘We are astonished at this unexpected change in criteria for bond insurer ratings,” Assured Guaranty said in a statement. ‘This latest proposed change in criteria by S&P is a primary example of why federal regulation of the rating agencies is needed to assure consistent credit rating principles and processes that are applied transparently.”

An MBIA spokesman was not immediately available to comment.

Assured Guaranty was the only company to write new municipal bond insurance in 2010, according to Thomson Reuters data. It lost its coveted ‘AAA” rating in October, but said it intended to still seek new business guaranteeing the debt of lower-rated municipal issuers.

Potential competitors to Assured Guaranty and others could have an easier time entering the market, though, if the new S&P criteria come into force.

The agency said the new guidelines would let it assign a rating to a start-up bond insurer with no track record, based on a review of management and their plans and policies. Typically, S&P said, it rates companies that have a five-year track record of performance.

(Reporting by Ben Berkowitz; Editing by Jan Paschal)

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