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12 Sep 2005
MOODY'S REPORTS: EFFECTS OF HURRICANE KATRINA ON GUARANTORS' CAPITAL POSITIONS APPEAR MANAGEABLE -- NO RATINGS CHANGES ANTICIPATED
New York, September 12, 2005 -- In its recent report on Hurricane Katrina's impact on financial
guaranty insurance companies, Moody's Investors Service concludes
that "the guarantors have ample liquidity to meet any near-term
claims as a result of the events, due to the basic structure of
their insurance policies, which cover scheduled principal and interest
payments and can only be accelerated at the guarantor's option,
and the guarantors' strong cash generating capacity."
The rating agency also said that it has evaluated some high-stress
scenarios to facilitate evaluation of this unprecedented event.
These stress scenarios suggest that, while ultimate losses from
the event could be significant, they appear unlikely to jeopardize
the financial guaranty insurers' current ratings.
"Even in the most stressful and highly-unlikely scenario,
all of the guarantors would still have enough capital to cover losses
at a 99.9% confidence level. Hard capital levels
sufficient to cover losses at the 99.9% confidence level
are consistent with a Aaa rating." says Senior Vice President
Stanislas Rouyer and author of the report. The analyst concludes
that guarantor losses, under even the highest stress scenario,
do not result in capital depletion to levels inconsistent with their ratings.
"If loss levels consistent with or in excess of losses anticipated
by the highest stress-test scenario were realized, there
would be a material deterioration in the capital positions for some of
the guarantors. Moody's has stated that for Aaa rated guarantors,
in normal operating environments, hard capital levels should be
equal to or greater than 1.3 times 99.9% confidence
level losses." says Moody's Managing Director Jack
Dorer. The capital cushion above one times loss coverage is designed
to absorb potential worst-case losses while still leaving the guarantors
with financial resources consistent with their Aaa ratings, and
therefore somewhat insulating their ratings from event risk.
"As a result," he states, "a capital ratio
between 1.0 times and 1.3 times does not present an immediate
threat to the rating of a guarantor, but it does leave a firm exposed
to subsequent capital stresses and, consequently, we do not
consider it a sustainable capital position for a Aaa rated guarantor over
an extended period of time."
"This means that if actual credit events caused some guarantors'
capital ratios to fall below 1.3 times coverage," Mr.
Rouyer explains, "the affected guarantors would need to take
immediate corrective action to adjust their capital position within a
relatively short time frame in order to avoid stress on their rating."
Failure to do so would likely have negative rating consequences.
According to Mr. Dorer, some of the actions that guarantors
would likely consider under such severe scenarios may involve slower growth,
suspension of stock buybacks, increasing their usage of reinsurance,
and possibly accessing the capital markets.
"Although the near-term financial consequences of this catastrophe
to financial guarantors are uncertain," Mr. Rouyer
concludes, "such losses as may be incurred would likely be
mitigated eventually by enhanced demand for their product, thus
causing prices to firm and perhaps even a broadening of the insurers'
penetration of the municipal market."
Moody's will continue to monitor the situation as it unfolds and
will update its views as necessary.
The report is titled "The Effect of Hurricane Katrina on Guarantors'
Capital Positions Appears Manageable: Situation is unlikely to affect
ratings, but uncertainty remains".
* * *
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site at www.moodys.com
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service
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