New York, January 17, 2013 -- Moody's Investors Service has downgraded the Insurance Financial Strength
(IFS) rating of Assured Guaranty Municipal Corp. (AGM) to A2 from
Aa3, the IFS rating of Assured Guaranty Corp. (AGC) to A3,
from Aa3, and the IFS rating of Assured Guaranty Re Ltd.
(AGRe) to Baa1 from A1. In the same rating action, Moody's
also downgraded the senior unsecured debt ratings of both Assured Guaranty
US Holdings Inc. and Assured Guaranty Municipal Holdings Inc.,
to Baa2, from A3. The outlook for the ratings is stable.
A full list of rating actions on Assured Guaranty Ltd. (Assured)
and its subsidiaries is provided below. The rating action also
has implications for the various transactions wrapped by AGM and AGC as
discussed later in this press release.
SUMMARY RATIONALE
"Today's rating action reflects Moody's downward reassessment
of Assured's business franchise, expected future profitability,
and financial flexibility," said Moody's. "Assured
operates in an industry that has not recovered from the financial crisis
and, like its peers, will continue to struggle in the face
of declining fundamentals, including a dramatic reduction in insurance
usage, modest profitability and still-meaningful legacy risk."
While the characteristics of Assured's insured portfolio's
credit quality and its capital adequacy generally remain strong (based
on the data from September 30, 2012), Assured's positioning
on key dimensions of financial strength, namely franchise strength,
profitability, and financial flexibility have weakened over time
largely as a result of enduring changes in the financial guarantor industry
and the broader economic environment as discussed in greater detail in
previous Moody's publications.
The combination of these characteristics, along with some residual
uncertainty with respect to the potential for outsized losses relative
to capital in the existing insured portfolio as well as more general unknowns
with respect to future insured portfolio production and capital retention,
lead to the overall A2 IFS rating assessment of the lead operating company.
RATING RATIONALE -- ASSURED GUARANTY MUNICIPAL CORP.
We have positioned the IFS rating of Assured Guaranty Municipal Corp.
(AGM, formerly Financial Security Assurance Inc.) at A2.
As the principal active operating insurer within the Assured group,
AGM is a key focus for our analysis of the consolidated group and an important
reference point for our ratings of AGC and AGRe, entities whose
underwriting profile has been sharply reduced in recent years.
Moody's approach to rating the company is outlined in "Moody's
Rating Methodology for the Financial Guaranty Insurance Industry",
published in September 2006 and as further described in previous reports
on the sector, including "Financial Guaranty Insurance:
Frequently Asked Questions" (September 2012) and "The Changing
Business of Financial Guaranty Insurance" (November 2008).
Our methodology centers on an assessment of five key factors (outlined
below), focusing on financial and operational metrics that are considered
together with qualitative assessments and analyst judgment.
Factor 1: Franchise Value and Strategy -- Moody's assessment
of this factor balances AGM's position as the sole active financial
guarantor to survive the 2007-2009 US financial crisis intact against
the dramatic decline of the industry. Structured finance business,
which accounted for a meaningful portion of AGM's pre-crisis
activity, has virtually disappeared. The target market for
insuring US public finance issuance (now primarily mid-to-low
investment grade municipal bonds) has also declined, and is now
less than one-third its size in 2006. While AGM benefits
from its position as the most active player in a smaller industry,
its overall business activity, as measured by the present value
of gross premiums written, remains well below pre-crisis
levels. The secular narrowing of its business opportunities,
and related pressure on value creation result in our low investment-grade
(Baa) assessment of this rating factor.
Factor 2: Insurance Portfolio Characteristics -- AGM's
insured portfolio is somewhat bifurcated from a risk perspective,
with a historically low-loss core municipal book as well as exposure
to certain sectors and credits experiencing material credit stress.
Based on Assured's internal ratings, the portion of AGM's
3Q2012 insured net par outstanding considered below investment grade was
roughly 3.3%. Under Moody's scenario analyses,
AGM's credit risk ratio (expected loss) and tail risk ratio (stress
case loss) were also consistent with a high investment-grade score
for this factor. In developing these estimates, certain adjustments
were made to input parameters for Moody's Portfolio Risk Model to
account for the 2010 recalibration of Moody's US public finance
ratings to the global scale. However, the portfolio does
have material exposure to legacy mortgage-related risks,
which are highly sensitive to weakness in the macroeconomic environment,
and large risks among individual municipal credits. We therefore
consider the company's portfolio characteristics score to be in
the A rating range.
Factor 3: Capital Adequacy --Our assessment of AGM's
point-in-time capital adequacy is very strong, reflecting
the relative emphasis on municipal risks as well as loss-mitigation
activities related to RMBS. Based on our base case estimated loss
distribution, AGM holds claims-paying resources sufficient
to cover losses at a confidence level corresponding to a high Aa score.
In this analysis, insured RMBS and certain other stressed exposures
are excluded from our Portfolio Risk Model, in order to allow for
a separate detailed loss assessment of those transactions. Potential
losses estimated for these stressed exposures are then combined with the
modeled losses on remaining exposures to derive an aggregate loss distribution
for the overall portfolio. However, estimates of capitalization
can vary considerably based on underlying assumptions about default probability,
loss-given default, and correlation. This kind of
variability leads us to assess capitalization somewhat more conservatively
than modeling might suggest, but still in the Aa range for this
factor.
Factor 4: Profitability -- AGM sustained large losses during
the financial crisis as a result of claims related to mortgage securitizations.
However, profitability has rebounded in recent periods. For
the three years ended December 31, 2011, AGM recorded an average
statutory return on equity of 15.7%, aided by representation
and warranties recoveries from mortgage originators and sponsors of RMBS.
Profitability has also been enhanced by large opportunistic purchases
of AGM-insured RMBS securities at deep discounts, which are
financially beneficial but suggest a lack of investor confidence.
Evaluated over longer time horizons, however, profitability
has weakened notably, with 5-year and 10-year average
statutory returns on equity at 0.5% and 6.8%,
respectively, which lags those of its specialty insurance and reinsurance
peers and, given the low levels of new business production,
we believe AGM's profitability will remain under pressure.
Consequently, Moody's views AGM's profitability to be
consistent with a score in the single-A range.
Factor 5: Financial Flexibility -- AGM's financial leverage
is characterized by a relatively modest debt load, and operating
earnings coverage has been relatively strong over the past three years.
As with profitability, however, earnings coverage is weaker
when a longer time frame (e.g. five years) is considered.
More importantly, in our view, various market indicators (such
as the firm's low stock price relative to operating book value per
share, and its elevated CDS spreads) suggest that the firm's
financial flexibility in accessing new funds on a cost-effective
basis could be quite constrained. For these reasons, we score
AGM's financial flexibility in the Baa range.
WHAT COULD CHANGE THE RATING UP OR DOWN
The main rating sensitivities for AGM relate to the composition and performance
of its insured portfolio as well as its capitalization and market support.
The rating could be lowered if the quality of its insured portfolio meaningfully
decreased or capital was withdrawn without an associated reduction of
risk, or if profitability reduced materially. The rating
could be upgraded if there were a significant rebound in business origination
at attractive pricing levels and financial flexibility improved.
However, fundamental challenges inherent in the business model make
a return to the Aa rating level unlikely.
The A2 IFS ratings of Assured Guaranty (Bermuda) Ltd. and Assured
Guaranty (Europe) Ltd. reflect a combination of formal and implicit
support from AGM. The Baa2(hyb) ratings of Sutton Capital Trusts
I-IV reflect the subordinated nature of the perpetual preferred
stock of AGM that can be delivered to the trusts; AGM has an option
to sell such securities to the Trusts at its sole discretion at any time.
RATING RATIONALE -- ASSURED GUARANTY CORP.
The A3 IFS ratings of Assured Guaranty Corp. (AGC) and its supported
affiliate, Assured Guaranty (UK) Ltd., are positioned
one notch below the A2 IFS rating of AGM reflecting its more limited stand
alone franchise, as well as its weaker capital profile, insurance
portfolio characteristics and profitability metrics. The Baa3(hyb)
ratings of Woodbourne Capital Trusts I-IV reflect the subordinated
nature of the perpetual preferred stock of AGC that can be delivered to
the trusts; AGC has an option to sell such securities to the Trusts
at its sole discretion at any time. Rating sensitivities for AGC
are similar to those described above for AGM.
RATING RATIONALE -- ASSURED GUARANTY RE
The Baa1 IFS rating of Assured Guaranty Re Ltd. and its supported
subsidiaries, Assured Guaranty Re Overseas Ltd. and Assured
Guaranty Mortgage Insurance Company, is one notch below the A3 IFS
rating of AGC and two notches below the A2 IFS rating of AGM and reflects
its limited independent franchise, its weaker relative capital profile,
the more flexible Bermudian regulatory environment relative to the U.S.,
and its role as internal group reinsurer, optimizing the risk profile
of its affiliated primary insurance writers. Rating sensitivities
for AGRe are similar to those described above for AGM and AGC.
RATING RATIONALE -- SENIOR DEBT AND ISSUER RATINGS
The Baa2 senior unsecured debt rating of Assured Guaranty Municipal Holdings
Inc. (AGM Holdings) is positioned at three notches below the IFS
rating of its core operating subsidiaries to reflect the structural subordination
of the parent companies relative to the operating companies. The
three notch difference between AGM and AGM Holdings reflects the typical
notching practice for U.S. insurance holding company structures.
The Baa2 senior unsecured debt rating of Assured Guaranty US Holdings
Inc. (AG US Holdings) is aligned with that of AGM Holdings,
reflecting its access to the financial resources of AGC, as well
as subordinated access to those of AGM Holdings. The debt of AG
US Holdings also benefits from a guarantee from Assured Guaranty Ltd.
The Baa2 issuer rating of Assured Guaranty Ltd. reflects its status
as the ultimate parent company of the group with direct access to dividends
from Assured Guaranty Re, which has substantial dividend capacity,
as well as subordinated access to the resources of both AGM and AGC through
intermediate holding companies. The provisional ratings of Assured
Guaranty Capital Trusts I and II are aligned with the provisional subordinated
debt ratings of their sponsor, Assured Guaranty Ltd.
The primary rating sensitivity of AGM Holdings, AG US Holdings and
Assured Guaranty Ltd. is to the financial strength of the underlying
operating companies and thus their ratings are likely to be positively/negatively
impacted by upgrades/downgrades at AGM, AGC and AGRe.
RATINGS LIST
Issuer: Assured Guaranty (Bermuda) Ltd.
..Downgrades:
....Insurance Financial Strength, Downgraded
to A2 from Aa3
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty (Europe) Ltd.
..Downgrades:
....Insurance Financial Strength, Downgraded
to A2 from Aa3
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty (UK) Ltd
..Downgrades:
....Insurance Financial Strength, Downgraded
to A3 from Aa3
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Capital Trust I
..Downgrades:
....Pref. Stock Shelf, Downgraded
to (P)Baa3 from (P)Baa1
..Outlook Actions:
....Outlook, Changed To Stable
Issuer: Assured Guaranty Capital Trust II
..Downgrades:
....Pref. Stock Shelf, Downgraded
to (P)Baa3 from (P)Baa1
..Outlook Actions:
....Outlook, Changed To Stable
Issuer: Assured Guaranty Corp
..Downgrades:
....Insurance Financial Strength, Downgraded
to A3 from Aa3
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Ltd.
..Downgrades:
.... Issuer Rating, Downgraded to Baa2
from A3
....Multiple Seniority Shelf, Downgraded
to (P)Baa2 from (P)A3
....Multiple Seniority Shelf, Downgraded
to (P)Ba1 from (P)Baa2
....Multiple Seniority Shelf, Downgraded
to (P)Baa3 from (P)Baa1
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Mortgage Insurance Company
..Downgrades:
....Insurance Financial Strength, Downgraded
to Baa1 from A1
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Municipal Corp.
..Downgrades:
....Insurance Financial Strength, Downgraded
to A2 from Aa3
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Municipal Holdings Inc.
..Downgrades:
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa3 (hyb) from Baa1 (hyb)
....Multiple Seniority Shelf, Downgraded
to (P)Baa2 from (P)A3
....Multiple Seniority Shelf, Downgraded
to (P)Baa2 from (P)A3
....Multiple Seniority Shelf, Downgraded
to (P)Ba1 from (P)Baa2
....Multiple Seniority Shelf, Downgraded
to (P)Ba1 from (P)Baa2
....Multiple Seniority Shelf, Downgraded
to (P)Baa3 from (P)Baa1
....Multiple Seniority Shelf, Downgraded
to (P)Baa3 from (P)Baa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from A3
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Re Ltd.
..Downgrades:
....Insurance Financial Strength, Downgraded
to Baa1 from A1
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty Re Overseas Ltd.
..Downgrades:
....Insurance Financial Strength, Downgraded
to Baa1 from A1
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Assured Guaranty US Holdings, Inc.
..Downgrades:
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Baa3 (hyb) from Baa1 (hyb)
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from A3
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Sutton Capital Trust I
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa2 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Sutton Capital Trust II
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa2 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Sutton Capital Trust III
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa2 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Sutton Capital Trust IV
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa2 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Woodbourne Capital Trust I
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa3 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Woodbourne Capital Trust II
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa3 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Woodbourne Capital Trust III
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa3 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
Issuer: Woodbourne Capital Trust IV
..Downgrades:
....Pref. Stock Non-cumulative
Preferred Stock, Downgraded to Baa3 (hyb) from A3 (hyb)
..Outlook Actions:
....Outlook, Changed To Stable From
Rating Under Review
TREATMENT OF WRAPPED TRANSACTIONS
Moody's ratings on securities that are guaranteed or "wrapped" by a financial
guarantor are generally maintained at a level equal to the higher of the
following: a) the rating of the guarantor (if rated at the investment
grade level); or b) the published underlying rating (and for structured
securities, the published or unpublished underlying rating).
Moody's approach to rating wrapped transactions is outlined in Moody's
special comment "Assignment of Wrapped Ratings When Financial Guarantor
Falls Below Investment Grade" (May, 2008); and Moody's November
10, 2008 announcement "Moody's Modifies Approach to Rating Structured
Finance Securities Wrapped by Financial Guarantors".
As a result of today's rating action, the Moody's-rated securities
that are guaranteed or "wrapped" by AGC or AGM are also downgraded,
except those with equal or higher published underlying ratings (and for
structured finance securities, except those with equal or higher
published or unpublished underlying ratings). For more information
on affected credits please refer to the Financial Institutions page at
www.moodys.com/fig.
The principal methodology used in these ratings was Moody's Rating Methodology
for the Financial Guaranty Insurance Industry published in September 2006.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
James Eck
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Stanislas Rouyer
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Assured Guaranty; lead insurer to A2
