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Rating Action:

Moody's assigns Ba2 rating to MBIA preferred stock, lowers MBIA Mexico to Aa1.mx

23 Dec 2008
Moody's assigns Ba2 rating to MBIA preferred stock, lowers MBIA Mexico to Aa1.mx

New York, December 23, 2008 -- Moody's Investors Service has assigned a Ba2 rating to the recently issued perpetual preferred stock of MBIA Insurance Corporation (MBIA; Baa1 insurance financial strength; developing outlook) following the firm's exercise of its option to put such preferred to its prefunded contingent capital facilities, North Castle Custodial Trusts I-VIII. The rating agency has also downgraded to Ba2, from Ba1, and withdrawn its ratings on the above mentioned trusts following their liquidation triggered by MBIA's exercise of its fixed rate option. The Ba2 preferred stock rating reflects some near term uncertainty about dividend capacity given the modest earned surplus and substantial risk of additional mortgage-related losses. Moody's also downgraded MBIA Mexico, S.A. de C.V.'s (MBIA Mexico) local scale rating to Aa1.mx, from Aaa.mx, reflecting the company's weakened credit profile (global scale rating at Baa1) and uncertainty about MBIA's continued strategic focus on Mexico. All ratings have a developing outlook.

Moody's noted that the transaction resulted in the issuance of $400 million in preferred stock to North Castle Custodial Trusts I-VIII, with proceeds used to support the capital position of MBIA. The trusts are being liquidiated as a result of MBIA's exercise of its fixed rate dividend option and the holders of the (former) trust securities will directly own the MBIA preferred stock. The preferred stock is perpetual and will pay a fixed dividend. The preferred stock issuance will increase MBIA's adjusted financial leverage moderately (to about 27%, from 25%). Moody's has not accorded equity credit to the preferred stock in measuring group leverage given its seniority to MBIA Inc.'s senior debt in liquidation. These securities rank junior to MBIA's $1 billion in surplus notes, rated Baa3. The preferred stock is non-cumulative unless MBIA Insurance Corp. pays dividends on its common stock (limited to holding company debt service), at which time preferred dividends would become cumulative.

The rating agency said that MBIA's ability to make dividend payments on the preferred stock is subject to New York State insurance law, which requires dividends to be paid out of earned surplus minus unrealized losses and restricts dividends during any 12 month period to the lower of the firm's investment income or 10% of policyholders' surplus or available unassigned surplus. While the insurer currently has adequate earned surplus, there is a risk that further material loss reserving could erode this balance and inhibit the ability to make preferred dividend payments. In light of remaining volatility within the insured portfolio and Moody's own estimate of expected RMBS losses to be incurred, the rating of operating company preferred was set at a level that reflects wider notching from the benchmark IFSR than is typical for that type of obligation.

Moody's estimates of ABS CDO losses are about $1.5 billion above the firm's recorded impairments, and preliminary revised estimates of second liens losses suggests aggregate RMBS losses meaningfully in excess of MBIA's recorded reserves at 9/30/2008. Mitigating in part these concerns is the modest preferred stock dividend, approximately 3.5% annually on $400 million of securities.

Moody's recently increased its loss expectations for MBIA's second lien mortgage exposures, reflecting growing concerns about their performance to date and the potential adverse effect of a weakening economy. Such revised loss estimates have substantially reduced the capital adequacy cushion that MBIA has at the current rating level. Moody's said that, because contingent capital facilities are included in its calculation of total capital, the conversion of these facilities to preferred stock does not significantly impact its view of MBIA's capital profile. The rating agency added, however, that the preferred stock issuance improves MBIA's liquidity position during a time of unprecedented stress.

The rating agency said that MBIA Mexico's dependence on the formal and informal support from MBIA Insurance Corporation (through a 100% quota share reinsurance agreement and a net worth maintenance agreement). With growing uncertainty about the strategic relevance of the Mexican market to MBIA, in light of the group's challenged credit and franchise profile, and the recent downgrade of MBIA Mexico's global scale rating to Baa1, Moody's 's downgraded the national scale insurance financial strength rating of MBIA Mexico to Aa1.mx, from Aaa.mx.

The last rating action on MBIA occurred on November 7, 2008 when Moody's downgraded MBIA Insurance Corporation's insurance financial strength rating to Baa1, with a developing outlook.

The principal methodology used in rating MBIA was Moody's Rating Methodology for the Financial Guaranty Insurance Industry, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating MBIA can also be found in the Credit Policy & Methodologies directory.

LIST OF RATING ACTIONS

The following rating has been assigned:

MBIA Insurance Corporation -- preferred stock at Ba2.

The following ratings have been downgraded and withdrawn due to liquidation of the contingent surplus note trust facilities:

North Castle Custodial Trusts I-VIII -- contingent capital securities to Ba2, from Ba1.

The following rating has been downgraded:

MBIA Mexico, S.A. de C.V. -- national scale insurance financial strength to Aa1.mx, from Aaa.mx. The outlook is developing.

OVERVIEW OF MBIA

MBIA Inc. (NYSE: MBI) provides financial guarantees to issuers in the municipal and structured finance markets in the United States, as well as internationally. MBIA also offers various complementary services, such as investment management and municipal investment contracts.

New York
Jack Dorer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Stanislas Rouyer
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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