Making it the third AAA-rated bond insurer to lose its top credit rating, Fitch Ratings said Wednesday that it had downgraded Financial Guaranty Insurance Company, the fourth largest monoline, to a AA rating. The two-notch downgrade comes as the guarantor failed to meet a deadline for strengthening capital, Fitch said. From the press statement:
As Fitch announced on Dec. 17, 2007, when it placed FGIC on Rating Watch Negative, the company has a modeled capital shortfall of more than $1 billion at the 'AAA' rating threshold. The existing capital deficiency, which Fitch now believes totals approximately $1.3 billion, resulted from rapid credit deterioration in FGIC's insured portfolio in particular: transactions backed by structured finance collateralized debt obligations backed by subprime residential mortgage-backed securities (RMBS) and direct exposure to RMBS, namely prime second-lien mortgages. The downgrade places FGIC's IFS ratings at a level commensurate with an 'AA' rating stress level under Fitch's most recent capital modeling.
The downgrade marks Fitch's third hit to a AAA-rated bond insurer. The rating agency downgraded Security Capital Assurance Ltd. on January 24, and Ambac Financial Group on January 18. The bond guaranty business in mortgage banking is coming under fire, as HW readers know. Various plans are being floated in an attempt to save many of the troubled insurers, but it appears -- for now, at least -- that any help is too late in arriving. Part of the reason that help is delayed, or may not be coming altogether, is because few have a handle yet on the enormity of exposure involved in both insuring mortgage-relative derivatives and maintaining more direct exposure to RMBS issues. Pershing Square Capital's Bill Ackman suggested today (H/T, Calculated Risk) in a letter sent to the SEC and New York state insurance regulators that both MBIA, who his hedge fund in short on, and Ambac are understating their losses by more than $20 billion. Disclosure: The author held no positions in any company mentioned in this story when it was originally published.