Ambac & MBIA Off Credit Watch

By: Dr. Jay H. Abrams
Chief Municipal Credit Analyst

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In a sign that the worst news may be behind the bond insurance industry, Standard & Poor’s has affirmed the ratings of both Ambac and MBIA and removed them from CreditWatch.  They were, however, assigned ‘Negative’ outlooks.

A strong capital position and ample claims paying ability were indicated as the main reasons for the rating affirmations.  The ratings of both insurance giants had been lowered from ‘AAA’ on June 5, 2008 due to their exposures to domestic non-prime mortgages and collateralized debt obligations (CDOs).

Success to date in remediating outstanding mortgage related exposure was sufficient for CreditWatch removal. 

CreditWatch is used by S&P to signal a short-term specific event or change to a credit’s profile that could initiate a rating change.  At the time of their downgrades, it was not clear to S&P whether Ambac and MBIA would have further erosion of their capital and increased exposure to the mortgage crisis.  Since then, both insurers have taken steps to limit future mortgage losses and have added additional capital.

The ‘Negative’ Outlooks assigned to both are less worrisome.  Outlooks have up to a three-year time horizon and indicate trends or business prospects that may cause a rating change, but are not necessarily indicative of one. 

In the case of both insurers, attempts to resurrect their financial guaranty business are underway through recapitalization of existing dormant business units, which would allow them to write new municipal bond insurance policies. 

S&P, in its announcement, lauded those plans, but assigned the ‘Negative’ Outlooks to reflect the lack of present new business, and the preliminary nature of both insurers’ prospects.

S&P’s rating actions were a vote of confidence in the ability of both companies to meet outstanding insurance commitments.  The only question, in the rating agency’s mind, was how they may fare writing new insurance in the future.  For S&P, that still remains up in the air.

8/18/2008