Correction to text, Nov. 8, 2007 Release: Moody's to Update Rating Opinion on Financial Guarantors
CORRECT RATING FOR CIFG GUARANTY IN FOURTH PARAGRAPH IS Aaa; IN SAME PARAGRAPH SUBSTITUTE "XL FINANCIAL" FOR "SECURITY CAPITAL"
Revised release follows
New York, November 08, 2007 -- This comment updates the status of Moody's analysis of the financial
guarantors and outlines the process we will follow to assess the impact
on their ratings of continuing deterioration in the RMBS market.
To evaluate the effect of this development on the ratings of the financial
guarantors, Moody's is re-estimating capital adequacy
ratios to reflect deterioration in the expected performance of transactions
within the guarantors' insured portfolios. At the same time,
we are updating our earlier stress-test by determining the impact
of higher subprime cumulative loss assumptions on both the guarantors'
direct RMBS and ABS CDO exposures, using granular underlying collateral
information as it relates to vintage, originator, and performance
On Sept 25, 2007, Moody's published a report on financial
guarantors' exposure to subprime mortgage risk. That report
cited the risk of guarantors' ABS CDO exposures as potentially significant,
given that their performance would magnify deterioration in underlying
RMBS collateral. Since that report, continued deterioration
in the mortgage market has increased the severity of stress scenarios.
There are meaningful differences among the rated guarantors in the potential
for capital deterioration to fall below the levels consistent with their
current ratings. As outlined in our September report, the
financial guarantors have varying levels of exposure to the mortgage crisis
given the specific content of their insured portfolios. While the
guarantors' direct exposure to recent vintage subprime RMBS is likely
to cause some capital depletion, companies with sizable exposure
to CDOs containing higher-risk mortgage-backed securities
are at the greatest risk of developing capital shortfalls. This
is particularly true when ABS CDO transactions contain large buckets of
underperforming 2006-07 vintage subprime RMBS collateral and/or
ABS CDO collateral containing subprime risks.
Based on initial analysis of the updated data, we have grouped the
guarantors' risk of a capital shortfall due to mortgage market deterioration
• Financial Security Assurance Inc. (FSA; Aaa),
Assured Guaranty Corporation (Aaa) and Radian Asset Assurance Limited
(Radian Asset; Aa3) have minimal exposure to ABS CDOs and,
for this reason, are highly unlikely to fall below Moody's
capital adequacy benchmarks for their rating category.
• MBIA Insurance Corporation's (MBIA; Aaa) is unlikely
to fall below Moody's Aaa capital adequacy benchmarks in a stress
• Ambac Assurance Corporation (Ambac; Aaa), XL Capital
Assurance Inc. (SCA; Aaa), and Financial Guaranty Insurance
Company (FGIC; Aaa) face moderate risk of falling below Moody's
Aaa capital adequacy benchmark under a stress scenario.
• CIFG Guaranty (CIFG, a subsidiary of Aa2-rated Natixis;
Aaa) is highly likely to fall below Moody's Aaa capital adequacy
benchmark in a stress scenario. The company has the largest exposure
to mezzanine CDOs relative to its capital base.
Since this analysis was undertaken, updated granular data will allow
for a more definitive analysis of capital adequacy under alternative stress
RECENT MORTGAGE PERFORMANCE
There has been further deterioration since Sept 25th in credit performance
across a wide range of recent vintage mortgage types including subprime
first and second liens, other non-prime mortgages and home
equity lines of credit, and on October 12th we increased our cumulative
loss assumptions for 2006-vintage subprime pools. Similarly,
ABS CDOs have been materially weakened by collateral deterioration given
their concentrated exposure to subprime RMBS and other ABS CDO tranches
and the leveraged nature of the risks. Our ratings assessment will
take into account not only the expected mortgage-related loss for
the guarantors but will also consider their ability to withstand a range
of other possible outcomes, reflecting the substantial uncertainty
in mortgage market outcomes at present.
With the exception of Radian Asset, rated financial guarantors have
large US residential mortgage exposures within their insurance portfolios
across a range of underlying collateral types and vintages. Within
this portfolio, there are large portions of their MBS books that
Moody's considers to be well protected, such as earlier-vintage
RMBS and recent vintage 1st lien subprime exposures due to the high level
of subordination associated with most of these transactions. Other
mortgage exposures, especially recent-vintage closed-end
second lien mortgages, have experienced significant deterioration,
and some of the guarantors are likely to see claims on certain transactions.
More importantly, collateral deterioration within recent-vintage
ABS CDOs has resulted in substantially reduced levels of protection on
a number of insured deals.
MOODY'S CAPITAL ADEQUACY BENCHMARKS
For a Aaa-rated guarantor, capital adequacy is evaluated
by comparing its hard capital to estimated losses at a confidence interval
of 99.9%. The target capital ratio for a Aaa rating
is 1.3x and the minimum is 1.0x, with the difference
being a cushion to absorb model, operational and portfolio migration
risks. As outlined in previous Moody's research, a
capital ratio in the buffer zone between 1.0x and 1.3x may
not present an immediate threat to the rating of a guarantor, although
it leaves a firm vulnerable to subsequent capital stresses and,
consequently, is not seen as a sustainable capital position over
an extended period of time.
IMPLICATION FOR RATINGS
By the end of the month, Moody's expects to complete its analysis
of the impact of mortgage market exposure on financial guarantors'
capital ratios which, for some companies, could result in
a rating affirmation, a change in rating outlook, a review
for downgrade, or a downgrade. A key consideration in this
analysis will be our view of each firm's current and prospective
capital adequacy, as reflected by their capital ratios compared
to Moody's established benchmarks. In light of recent trends
in the mortgage market, and particularly the potential volatility
of the ABS CDO exposures, we will consider capital ratios under
a distribution of scenarios.
We will expect Aaa rated guarantors to exceed the 1.3x capital
ratio benchmark in the expected base case as well as to exceed the 1.0x
level in a range of stress scenarios. Establishing appropriate
stress levels in this highly volatile market will be a focus of analytic
attention In addition to capital levels, Moody's will continue
to study any capital remediation plans, franchise sustainability,
risk management, and all other means of support.
THE BUSINESS OF BOND INSURANCE
Financial guarantors provide credit protection by writing financial guaranty
insurance policies and credit default swaps in both the primary and secondary
markets, focusing on insuring investment-grade obligations
in the municipal and structured finance sectors globally. Of the
industry's $2.3 trillion in insured par, roughly
57% consists of US municipal exposure, with structured and
international sectors comprising most of the balance. By providing
credit protection on a financial obligation, a guarantor unconditionally
and irrevocably guarantees payment of principal and interest of an insured
obligation when these payments are due, providing an additional
level of credit protection beyond the stand-alone creditworthiness
of the underlying obligation. Should an event of default occur,
payments under the insurance policy may not be accelerated by the policyholder
without the consent of the insurer. Most credit default swap contracts
are written with similar financial guaranty-like terms, and
do not require collateral posting.
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service