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Rating Action:

Moody's downgrades FGIC to Baa3; ratings remain under review for possible downgrade

31 Mar 2008
Moody's downgrades FGIC to Baa3; ratings remain under review for possible downgrade

New York, March 31, 2008 -- Moody's Investors Service has downgraded to Baa3, from A3, the insurance financial strength (IFS) ratings of the operating subsidiaries of FGIC Corporation, including Financial Guaranty Insurance Company and FGIC UK Limited (collectively "FGIC"). Moody's has also downgraded the senior debt rating of the holding company, FGIC Corporation to B3 from Ba1, and the contingent capital securities ratings of Grand Central Capital Trusts I -- IV to B2 from Baa3. These rating actions reflect the company's inability to date to raise new capital, the increased likelihood of FGIC breaching minimum regulatory capital requirements, and the effects of its current inability to upstream dividends without prior regulatory approval. The ratings remain under review for possible downgrade.

On March 28, 2008, FGIC filed its statutory statements indicating that, as a result of a loss of $1.5 billion, its statutory capital stood at approximately $260 million as compared to the minimum statutory capital requirement of $65 million. The three notch downgrade of FGIC's IFS ratings to Baa3 reflects Moody's view that the cushion above the required regulatory minimum may not be sufficient to absorb additional losses associated with FGIC's mortgage related exposures and the recent deterioration of Jefferson County (AL) bonds, to which FGIC has sizable exposure (see Moody's press release dated March 27, 2008 relating to the downgrade of Jefferson County Sewer Revenue Bonds to Caa3). Should FGIC breach the $65 million minimum statutory capital requirement the New York State Insurance regulator could take action to assume control of the operating company.

FGIC also announced that, as of 12/31/07, it had breached regulatory aggregate and single risk limits, which could cause the New York State Insurance Department to order that the company cease writing new business. FGIC has disclosed, however, that it has already voluntarily stopped writing new business in an attempt to improve its capital position through portfolio amortization.

According to Moody's, the downgrade of FGIC's contingent capital securities, Grand Central Trusts I-IV, to B2 reflects the increased possibility that the payment of preferred dividends might not be permitted by the regulator should FGIC decide to exercise its option to put non-cumulative preferred stock to the trusts. Moody's added that the downgrade of FGIC Corporation's senior unsecured debt to B3 reflects the operating company's inability, without regulatory approval, to upstream dividends to the holding company to service debt, coupled with the structural subordination of holding company senior bonds to operating company preferred stock.

Moody's noted that FGIC Corporation, having drawn the full amount of its bank credit facility, has approximately $250 million in holding company liquidity to pay interest on its bank facility and $325 million in senior bonds. However, the operating company's limits on writing new business and its inability to upstream dividends without regulatory approval heightens the refinancing risk associated with the bank credit facility, which matures in 2010.

Moody's also noted that FGIC has guaranteed the termination payments for certain public finance swap arrangements. Swap termination payments could be triggered if FGIC and/or (typically, "and") the issuer were downgraded below certain rating thresholds and the issuer defaults on the termination payment. At this time, FGIC is not exposed to imminent termination payments. However, Moody's will continue to monitor the situation to determine the extent of possible future termination payments and the implications to FGIC's liquidity profile and capital adequacy.

FGIC announced that it has taken legal action against parties related to one ABS CDO transaction which accounts for over $900 million or 75% of the credit impairments taken in the fourth quarter of 2007. While the ultimate outcome of this dispute remains uncertain, a resolution favorable to FGIC could have positive implications for the company's capital adequacy position.

The ratings remain under review for downgrade to reflect the heightened risk of FGIC breaching minimum regulatory capital requirements, and the uncertain consequences for policyholders and creditors of possible regulatory intervention. Moody's stated that the ratings review will focus on additional details relating to FGIC's restructuring and recapitalization plan, any further movement in loss reserves at the end of 1Q2008, the implications of potential swap termination payments to liquidity and capital, the company's ongoing compliance with statutory requirements, and the implications of any actions on the part of the regulator.

LIST OF RATING ACTIONS

The following ratings have been downgraded, and remain on review for possible downgrade:

Financial Guaranty Insurance Company -- insurance financial strength to Baa3, from A3;

FGIC UK Limited -- insurance financial strength to Baa3, from A3;

Grand Central Capital Trusts I-VI -- contingent capital securities to B2, from Baa3; and

FGIC Corporation -- senior unsecured debt to B3, from Ba1.

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 FGIC are also downgraded to Baa3, and remain on review for further downgrade, except those with higher published underlying ratings.

A list of these securities will be made available under "Ratings Lists" at www.moodys.com/guarantors.

OVERVIEW OF FGIC CORPORATION

FGIC Corporation is a holding company whose primary operating subsidiaries are Financial Guaranty Insurance Corporation and FGIC UK Limited, provide credit enhancement and protection products to the public finance and structured finance markets throughout the United States and internationally. FGIC Corporation is privately owned by an investor group consisting of The PMI Group, GE and private equity firms Blackstone, Cypress and CIVC. At 12/31/07, FGIC Corporation reported GAAP losses of $1.8 billion and had shareholders' equity of approximately $584 million.

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

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

No Related Data.
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