Completing a well-publicized review of financial guaranty companies, Moody’s Investors Service said Friday that both Financial Guaranty Insurance Company and XL Capital Assurance Inc. were placed on review for possible downgrade, with Moody’s citing concerns over a lack of capital adequacy to maintain an ‘Aaa’ rating at both firms. MBIA Insurance Corporation and CIFG Guaranty were affirmed, but the rating outlooks for both insurers were moved to negative; Ambac Assurance Corporation, Assured Guaranty Corp, and Financial Security Assurance Inc. and Radian Asset Assurance saw their respective ratings affirmed with a stable outlook. Click here to read the full report (subscription req’d). Moodys, along with both Fitch Ratings and Standard and Poor’s, has been reassessing the capital adequacy of financial guarantors in light of higher expected losses from credit enhancement provided to residential mortgage-backed securities (RMBS) and collateralized debt obligations of asset backed securities (ABS CDOs) that include RMBS. FGIC in particular was singled out by Moody’s as problematic, with the rating agency saying analysis “suggests … current capitalization falls below the Aaa target level, and would fall below the minimum Aaa level” under a so-called stress scenario in which 19 percent of subprime mortgages underwritten in 2006 default. (For the record, I doubt that’s a hypothetical stress scenario; I think that may be reality, and not just for the 2006 vintage.) XL Capital Assurance finds itself in slightly better position relative to FGIC, as Moody’s concluded that its current capitalization was above the Aaa target level — but the agency said that capital adequacy would fall below the minimum needed to maintain the Aaa rating in the so-called “stress scenario” outlined above. As a result of these reviews, Moody’s said that securities wrapped by FGIC and XL Capital Assurance are also under review for possible downgrades. At the time this story was published, the list of impacted transactions was not yet available on Moody’s Web site, although the agency characterized the volume as large enough that its Web site would not immediately be able to provide full listings for all affected deals. For more information, visit http://www.moodys.com/guarantors.
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