Anything Moody's Investors Service can do, Standard & Poors can do faster. S&P's downgrade of MBIA Inc. and Ambac Financial Group Inc. on Thursday beat Moody's to the punch as Moody's on Wednesday
only put the monoline's triple-A rating on review for possible downgrade.
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S&P lowered MBIA's and Ambac's financial strength ratings to double-A from triple-A and placed them both on CreditWatch with negative implications. S&P attributed its move to a "belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility," adding "continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO (collateralized debt obligation) structures will place increasing pressure on capital adequacy."
S&P's downgrade may be due to dim prospects for new business; however, the ratings agency's move is something of a catch-22 as lowered ratings makes it more difficult for the bond insurers to write new policies. The timing of the downgrade is also somewhat questionable as it comes in the wake of MBIA's and Ambac's recent capital raises. MBIA earlier this year raised about $2.6 billion in new capital, including an $800 million investment from Warburg Pincus, a stock offering and a surplus notes offering to maintain its triple-A status. Ambac just a few months ago sought to pad its safety net against future losses via a $1.5 billion stock and convertible securities offering.
Ambac and Jay Brown, MBIA's chairman and CEO, in separate statements in response to the Moody's move on Wednesday both questioned the ratings agency's action and said they do not plan to raise any new capital in the short term. The bond insurers have yet to publicly respond to S&P's action.
Are these ratings actions just overcompensation for late reactions prior to the credit crunch? Moody's has especially come under fire of late due to the high ratings it had assigned to risky structured finance products, which it quickly began to downgrade amid the credit crunch. Some said the downgrade moves were too little, too late, and Moody's president and chief operating officer Brian Clarkson, who has been seen as a force behind Moody's structured finance ratings, earlier this month announced plans to retire in July.
MBIA and Ambac shareholders may be overcompensating for what might have been an sell-off overreaction on Wednesday following the Moody's news. Following double-digit declines in both stocks on Wednesday, MBIA and Ambac in late afternoon trading on Thursday ticked up nearly 5% to $5.91 and about 2.8% to $2.56 per share, respectively. - Michael Rudnick
