Moody's downgrades CIFG to A1, from Aaa
New York, March 06, 2008 -- Moody's Investors Service has downgraded to A1, from Aaa,
the insurance financial strength ratings of CIFG Guaranty, CIFG
Europe and CIFG Assurance North America, Inc. (collectively
"CIFG"). These rating actions reflect Moody's assessment of CIFG's
weakened capitalization, impaired business opportunities,
and uncertain strategic direction, as a result, in part,
of its exposures to the US residential mortgage market. The rating
outlook is stable.
IMPACT ON RATINGS OF INSURED OBLIGATIONS
Moody's ratings on securities that are guaranteed or "wrapped" by a financial
guarantor are maintained at a level equal to the higher of a) the rating
of the guarantor or b) the published underlying rating. Using this
modified "credit substitution" approach, and following today's rating
action, the Moody's-rated securities that are guaranteed
or "wrapped" by CIFG are also downgraded to A1, except those with
higher published underlying ratings.
A list of these securities will be made available under "Ratings Lists"
In the period since the initiation of Moody's rating review of CIFG,
the rating agency has received limited requests from issuers for public
underlying ratings on CIFG's wrapped securities. Moody's notes,
however, that today's rating action could precipitate additional
requests for public underlying ratings of CIFG wrapped securities,
and that certain ratings on associated securities could be upgraded as
a consequence, based on the modified credit substitution approach
OVERVIEW OF RATING APPROACH
As outlined in Moody's Rating Methodology for Financial Guarantors,
we have evaluated CIFG along five key rating factors: 1) franchise
value and strategy, 2) insurance portfolio characteristics,
3) capital adequacy, 4) profitability, and 5) financial flexibility.
KEY RATING FACTORS -- BUSINESS AND FINANCIAL PROFILE
In Moody's opinion, CIFG's significant exposure to mortgage-related
risk has material adverse consequences for its business and financial
profile beyond the associated impact on capitalization, and affects
our opinion about CIFG's other key rating factors.
Moody's believes that CIFG's significant exposure to the mortgage sector,
especially ABS CDOs is indicative of a risk posture far greater than would
be consistent with a Aaa rating going forward. The company's participation
in several mezzanine ABS CDOs, in particular, contributed
to this view. The rating agency noted that CIFG is implementing
significant changes to its governance and risk management to address some
of the shortcomings of its prior strategy.
Moody's added that CIFG, as the smallest and most recent entrant
to the financial guaranty sector, has not yet established a market
position on par with its larger competitors and that the ongoing credit
stress at the firm significantly weakened its franchise, raising
questions about the degree to which it will be able to regain market traction
within a reasonable timeframe. CIFG's profitability is likely to
remain weak over the near to intermediate term, particularly given
the losses that are likely to be generated by its insurance portfolio,
the expected reduced issuance volume, and the limited in-force
book of business, said Moody's.
In terms of financial flexibility, CIFG, like other financial
guarantors, benefits from its ability to pay claims over an extended
period of time, typically scheduled interest and principal at maturity.
Moody's has also considered the potential for calls on liquidity at CIFG,
given the expectation of increasing claims levels, in the context
of available resources, and notes the firm has a high quality and
liquid investment portfolio.
Moody's said that CIFG's two parents, Caisse Nationale
des Caisses d'Epargne Prevoyance (CNCEP) and Banque Fédérale
des Banques Populaires (BFBP), have demonstrated substantial support
of CIFG through their $1.5 billion capital injection in
December 2007, but have recently taken a more guarded posture,
ruling out further capital infusions at this time and assessing the attractiveness
and feasibility of various strategic options for their subsidiary.
The rating agency noted that the strategic direction ultimately pursued
by CIFG may materially affect the credit profile of the firm, but
that CNCEP and BFBP appear to be committed to favor options that would
preserve CIFG's credit profile and that regulatory rules and other
factors provide some additional comfort in that regard.
Although capitalization is not currently a constraint on the rating,
Moody's believes that, short of a major strengthening in the
firm's operations, meaningful gains in franchise value,
and long term support from strong and committed parents, CIFG is
unlikely to establish a credit profile consistent with a higher rating
in the near term.
KEY RATING FACTORS -- CAPITAL ADEQUACY
To estimate capital adequacy, Moody's has applied its traditional
portfolio risk model for determining stress losses on the non-mortgage
related portion of CIFG's insured portfolio, and alternative stress
tests for the mortgage and mortgage-related CDO exposure.
For mortgage-related exposures, stress losses were estimated
using assumptions consistent with a scenario where 2006 subprime first-lien
mortgages realize an average of 21% cumulative pool losses,
with other vintages and products stressed accordingly. Stress-level
losses for RMBS transactions were assessed on a transaction-by-transaction
basis, while loss estimates for ABS CDOs were derived using a stochastic
simulation model which applied stress to specific underlying collateral
tranches within the CDOs. Estimated tranche-level losses
were computed based on the structure of those tranches (e.g.,
attachment and detachment points) and estimates of their performance relative
to the average.
Losses estimated under the approach described above were present-valued
to reflect estimates of the payout pattern that would emerge, based
on the collateral type. For ABS CDOs, consideration was given
to specific contractual features within associated CDS contracts.
These factors resulted in aggregate present value discounts to principal
loss estimates of approximately 8% for RMBS and 30% for
ABS CDOs. Non-mortgage risks are discounted within the portfolio
model based on estimates of payout patterns as well.
In comparing estimated stress losses to claims paying resources and associated
rating levels, Moody's combines an estimated loss distribution for
mortgage risks with one for non-mortgage risks, assuming
a correlation between the two that ranges from 90% (for Aaa) down
to 30% (for Baa3). Claims paying resources are then compared
to the indicated capital need, at the target benchmark (1.3x
Based on the risks in CIFG's portfolio, as assessed by Moody's according
to the approach outlined above, estimated stress-case losses
would approximate $2.7 billion. This compares to
Moody's estimate of CIFG's claims paying resources of approximately $3.0
billion, resulting in a total capital ratio of 1.12x,
which exceeds the "minimum" Aaa level, but is short of the 1.3x
Aaa "target" level by about $500 million. Moody's further
noted that in the most likely or "expected" scenario, CIFG's insured
portfolio will incur lifetime losses of approximately $760 million
in present value terms, and that CIFG's current claims-paying
resources cover this expected loss estimate by about 4.0x.
LIST OF RATING ACTIONS
The following ratings have been downgraded:
CIFG Guaranty -- insurance financial strength downgraded
to A1, from Aaa;
CIFG Europe -- insurance financial strength downgraded to
A1, from Aaa; and
CIFG Assurance North America, Inc. -- insurance
financial strength downgraded to A1 from Aaa.
OVERVIEW OF CIFG
Established in 2001, CIFG Guaranty provides financial guarantees
to issuers in the municipal and structured finance markets in the US and
Europe through CIFG Assurance North America, Inc. and CIFG
Europe. Caisse Nationale des Caisses d'Epargne Prévoyance
(rated Aa2/P-1/B-) and Banque Fédérale des
Banques Populaires (rated Aa2/P-1/B-) recently gained control
of CIFG when they invested approximately $1.5 billion in
the financial guarantor, which was previously owned by their joint
venture Natixis (rated Aa2/P-1/C).
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service