Shares of MBIA Insurance Corp. and Ambac Assurance Corp. nosedived Wednesday afternoon as Moody's Investors Service announced it may downgrade its credit ratings on the two bond insurers. The possible downgrade is a result of deteriorating financial conditions at both bond insurers attributed to the mortgage-fueled credit crunch. MBIA fell 80 cents, or 13%, to $5.82 while Ambac dropped 47 cents, or 16%, to $2.52 as Moody's placed its Aaa rating on MBIA and Ambac on its review for possible downgrade. Moody's warned that it may downgrade MBIA one level to Aa and Ambac two notches to A.
Continue reading below
Moody's said in a statement the review for a downgrade on Ambac was prompted "by concerns about the deterioration in ABK's financial flexibility since the company's $1.5 billion capital raise in March 2008, as evidenced by the substantial decline in the firm's market capitalization and high current spreads on its debt securities, making it increasingly difficult to economically address potential shortfalls in the company's capital position should markets continue to worsen."
Meanwhile, Moody's announcement was prompted "by growing concern that MBIA's credit profile may no longer be consistent with current ratings given the company's diminished new business prospects and financial flexibility, coupled with the potential for higher expected and stress losses within the insurance portfolio."
For both bond insurers, a downgrade below a triple-A means that they won't be able to write new business, which would further contribute to their financial woes. - Gerald Magpily
See MarketWatch article
See Moody's release on MBIA
See S&P's press release on Ambac
