Moody’s: Subprime Exposure of Financial Guarantors ‘Well Contained’ — Maybe

In a new report released today, Moody’s Investors Service said that it expects rated financial guaranty insurance companies to be able to ride out the subprime mortgage storm. Citing credit enhancement levels exceeding currently projected losses, Moody’s said the “risks presented by the direct insurance of subprime RMBS transactions will likely be well contained.”

Moody’s said it also expects guarantors’ ABS CDO exposure to be limited as well, assuming what the agency said was a “base case” of 10 percent average cumulative losses.

Should losses reach higher, however, that confidence would clearly wane:

Further deterioration in the US subprime residential mortgage market, however — up to 14% cumulative subprime losses on average — could have significantly different net effects on individual guarantors, given their unique risk and franchise profiles.

Under the more stressful scenario modeled above, of those guarantors with sizable notional ABS CDO exposure, MBIA (Aaa IFS) would remain adequately capitalized for its rating, but AMBAC, FGIC, SCA and CIFG would all need to undertake capital strengthening measures to maintain their Aaa ratings. FSA (Aaa), Assured (Aaa) and Radian Asset (Aa3) have not insured meaningful volumes of ABS CDOs in recent years.

Moody’s also noted that it expects current turmoil in the secondary markets, and associated credit re-pricing, to drive greater demand within the financial guarantor business as a whole.

The full report is available to Moody’s subscribers.