MBIA: Moody's Twists the Knife

Ouch! This news is really bad for MBIA: Moody's has slashed its ratings by even more than it cut the ratings on Ambac. It's a deep cut, with real financial consequences:

This ratings action will give certain holders of guaranteed investment contracts the right to terminate the contracts or to require that additional collateral be posted.

The main rating, of MBIA Insurance Corporation, the insurance subsidiary, has fallen all the way to A2 from Aaa. That's a five-notch downgrade, which I think I'm safe in saying is more severe than anybody expected.

And there's more:

Moody's also downgraded the surplus note rating of MBIA Insurance Corporation to Baa1, from Aa2, and the senior debt rating of the holding company, MBIA, Inc. (NYSE: MBI) to Baa2, from Aa3.

Yes, those are Bs. Investment-grade Bs, to be sure, but Bs all the same. Both of these constitute six-notch downgrades: obviously keeping newly-raised equity at the holding company level didn't help its ratings at all.

These downgrades severely impair MBIA's ability to continue as a going concern. Until now, I've been focused on MBIA's solvency: most crudely, whether or not its assets exceed its liabilities. (They do.) But CEO Jay Brown doesn't just want a solvent company: he wants a company with a future. And it's hard to see where that future lies if the holdco is barely holding on to an investment-grade credit rating. The whole point of insurance companies is that they're ultrasafe: as soon as that safety is called into question, no one wants to do business with them any more.

Until this morning, I thought MBIA's plan to create a new triple-A subsidiary had some hope to it. But now that seems pretty improbable. As Moody's says, in something of a self-fulfilling prophecy, "today's rating action... reflects MBIA's... impaired franchise".

So, MBIA still has money. As Moody's also says:

the group remains strongly capitalized, estimated to be consistent with a Aa level rating, and benefits from substantial embedded earnings in its existing insurance portfolio.

In numbers:

Moody's has re-estimated expected and stress loss projections on MBIA's insured portfolio, focusing on the company's mortgage-related exposures as well as other sectors of the portfolio potentially vulnerable to deterioration in the current environment. Based on Moody's revised assessment of the risks in MBIA's portfolio, estimated stress-case losses would approximate $13.6 billion at the Aaa threshold and $9.4 billion at the A2 threshold. This compares to Moody's estimate of MBIA's claims paying resources of approximately $15.1 billion... Relative to Moody's 1.3x "target" level for capital adequacy, MBIA is currently $2.6 billion below the Aaa target level and is $2.8 billion above the A2 target level.

But money alone might not be enough. Especially since Moody's is leaving the door open to further downgrades:

The outlook for the ratings is negative, reflecting the material uncertainty about the firm's strategy and the non-negligible likelihood of further adverse developments in its insurance portfolios or operations.

At this point, the best-case scenario for MBIA is that credit markets calm down enough for the company to be acquired by someone with credibly deep pockets. (Sounds a bit like Lehman Brothers.) Absent that scenario, which admittedly is pretty improbable, things are likely to be pretty precarious at MBIA for the foreseeable future.

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