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“Several markets are still overvalued”
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Moody's Downgrades XL Capital; Latest Monoline to Falter

Yesterday's wide-ranging report on bond insurers here at HW is already out of date: late Thursday, Moody's Investors Service downgraded the insurer financial strength rating of Security Capital's bond insurance arm, XL Capital Insurance -- making it the latest monoline to lose its AAA-rated status, and providing the latest headache for the mortgage market. The monoline bond insurers provide the top-rated portions of MBS deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers (like XLCA) are wreaking havoc on the already unsteady mortgage-backed bond market, as investment-grade securities are seeing their top ratings vanish. This wasn't just any downgrade, either; XLCA was hit with a six-notch downgrade from AAA to A3, which should throw earlier assumptions regarding a bank-led bailout of certain insurers into question. Moody's, as well as other rating agencies, had previously suggested that any downgrades to AAA-rated bond insurers would be in the neighborhood of one to two notches -- an assumption that has factored into discussion of any bailout attempts thus far, according to numerous media reports. But a six-notch downgrade? It's time to rethink those assumptions, all over again. As a result of the downgrade, tens of thousands of AAA-rated securities wrapped by XLCA -- including numerous RMBS issues -- were also downgraded six notches, to A3. To see the full list, including affected deals from Countrywide, C-BASS, IndyMac, Greenpoint and Option One, click here. Moody's said the capitalization required to cover losses in SCA's insured portfolio at the Aaa target level would exceed $6 billion, compared to estimated claims paying resources of $3.6 billion; the rating agency said it considered XLCA's capitalization level more consistent with the single A rating level. The agency also said that it estimated lifetime expected losses of approximately $1.2 billion in present value terms at the monoline. For more information, visit http://www.moodys.com.

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