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20 May 2008
Moody's downgrades CIFG to Ba2 leaves rating under review direction uncertain
New York, May 20, 2008 -- Moody's Investors Service downgraded the insurance financial strength
ratings of CIFG Guaranty, CIFG Europe, and CIFG Assurance
North America, Inc (collectively CIFG) to Ba2, from A1,
and kept the ratings under review with direction uncertain. The
rating agency said that the rating actions reflect the high likelihood
that, absent material developments, the firm will fail minimum
regulatory capital requirements in New York and Bermuda due to expected
significant increases in modeled loss reserves on ABS CDOs. The
breach of such regulatory capital requirements would put the firm in a
precarious position, especially in light of the solvency provisions
embedded in its CDS exposures. The review with direction uncertain
reflects potential changes in the credit profile of the firm that could
occur over the next couple of months as CIFG attempts to implement capital
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 a)
the rating of the guarantor or b) the published underlying rating.
However, as CIFG's rating is downgraded below the investment
grade level, and reflecting current rating agency policy,
Moody's will withdraw ratings on CIFG-wrapped securities
for which there is no published underlying rating. Should the guarantor's
rating subsequently move back into the investment grade range or should
the agency subsequently publish the underlying rating, Moody's
would reinstate the rating to the wrapped instruments. For further
information please see Moody's recently published special comment entitled:
Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment
Grade (May 6, 2008).
A list of the securities affected will be made available under "Ratings
Lists" at www.moodys.com/guarantors.
Moody's said that CIFG employs a loss reserving approach for its
insured ABS CDOs that uses as inputs the lowest available ratings of any
of three rating agencies on underlying CDO collateral. With further
downgrades of RMBS securities by different rating agencies occurring since
the beginning of the year, Moody's believes CIFG will experience
sizable increases in reserves, and could breach regulatory capital
requirements in the near future. Moody's noted that the company
has failed to meet certain regulatory filing deadlines in both the US
and Bermuda, including 1st quarter 2008 results for CIFG Assurance
North America, Inc. and year-end 2007 financials for
Moody's believes that the firm's loss reserve methodology may result in
a substantial conservative bias by using the lowest rating on the underlying
exposures of its ABS CDOs given the material differences in average collateral
ratings across rating agencies. In March, Moody's had
estimated CIFG's expected loss on ABS CDOs at $433 million,
and stress losses, consistent with a 21% cumulative loss
on 2006 vintage subprime first liens pools, at $1.3
The rating agency added that the expected substantial increase in loss
reserves, despite their potential conservativeness, could
have material adverse effects on the firm's financial condition.
A large part of CIFG's credit exposure was written in Credit Default
Swap (CDS) form, and contains a clause that exposes the firm to
mark to market termination in the event of insolvency. The current
mark to market value of such CDS contracts is a multiple of the expected
economic loss on the exposure (as estimated by Moody's and CIFG)
and well in excess of the firm's claims paying resources,
A breach of minimum regulatory capital requirement may not, in itself
mean that the firm is insolvent and therefore trigger a market value termination
of the CDS contracts, but it does expose the firm to possible regulatory
actions and other risks that could trigger such termination given the
lack of specificity as to what would qualify as insolvency under the terms
of the contracts, added the rating agency. CIFG is pursuing
various strategic options, including a recapitalization or a commutation
of its ABS CDO exposures that, if successful, would essentially
remove the risk of market value termination. The rating agency
added, however, that until such a solution is implemented,
CIFG remains exposed to a heightened risk of extreme financial distress.
CIFG's parents, Caisse Nationale des Caisses d'Epargne Prévoyance
(CNCEP) and Banque Federale des Banques Populaires (BFBP) are expected
to play a decreasing role in the firm's future, and Moody's
believes it is unlikely that they will provide significant additional
support to their subsidiary beyond their recent $1.5 billion
Moody's said that the review with direction uncertain reflects the
expectation of material changes to the firm's financial profile
over the next few months. In the unlikely event that a market value
termination of CIFG's CDS exposures is triggered, the firm's
rating would likely fall to the Ca-C range due to the inability
of the firm to fully meet such obligations out of its financial resources.
Under the most likely scenario, where the firm is able to substantially
remove the risk of market value termination, the ratings could go
up, but are likely to remain below investment grade, reflecting
Moody's serious concerns about the insurer's operational effectiveness
and governance. Moody's will continue to closely monitor
the evolving credit profile of CIFG and will update its opinion as material
The following ratings have been changed and kept under review direction
CIFG Guaranty -- insurance financial strength at Ba2,
CIFG Europe -- insurance financial strength at Ba2,
from A1; and
CIFG Assurance North America, Inc. -- insurance
financial strength at Ba2, from A1.
Established in 2001, CIFG has provided 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,
though it ceased writing business earlier this year to conserve capital
and to evaluate its strategic alternatives. Caisse Nationale des
Caisses d'Epargne Prévoyance (rated Aa2/P-1/B-) and
Banque Federale 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
No Related Data.
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