Moody's downgrades FGIC's Aaa rating to A3
New York, February 14, 2008 -- Moody's Investors Service has downgraded to A3, from Aaa,
the insurance financial strength 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 Ba1 from Aa2, and the contingent capital securities
ratings of Grand Central Capital Trusts I-VI to Baa3 from Aa2.
These rating actions reflect Moody's assessment of FGIC's
meaningfully weakened capitalization and business profile resulting,
in part, from its exposures to the US residential mortgage market.
These ratings remain on review for possible downgrade, reflecting
continuing uncertainty about the firm's strategic and capital plans.
An unfavorable outcome in those areas could lead to a lower financial
strength rating most likely to the Baa level.
These rating actions result from Moody's ongoing assessment of ratings
in the financial guaranty insurance sector, and follow the downgrade
on February 7, 2008 of XL Capital Assurance Inc., from
Aaa to A3. Among primary financial guarantors, Moody's
ratings of MBIA and Ambac remain under review for possible downgrade,
with those reviews expected to conclude within the next few weeks.
Although further analysis remains to be completed before those reviews
can be brought to conclusion, Moody's believes that,
in contrast to XL Capital Assurance and FGIC, MBIA and Ambac are
better positioned from a capitalization and business franchise perspective.
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 A3,
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"
In the period since the initiation of Moody's rating review of FGIC,
the rating agency has received limited requests from issuers to publicly
disclose underlying ratings on FGIC's wrapped securities.
Moody's notes, however, that today's rating action
could precipitate additional requests for disclosure of underlying ratings
of FGIC wrapped securities, and that certain ratings on associated
securities could be upgraded as a consequence, based on the modified
credit substitution approach outlined above.
OVERVIEW OF RATING APPROACH
As outlined in Moody's Rating Methodology for Financial Guarantors,
we have evaluated FGIC along five key rating factors: 1) franchise
value and strategy, 2) insurance portfolio characteristics,
3) capital adequacy, 4) profitability, and 5) financial flexibility.
Of these factors, capital adequacy is given particular emphasis.
To estimate capital adequacy, Moody's has applied its traditional
portfolio risk model for determining stress losses on the non-mortgage
related portion of FGIC'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 6% for RMBS and 27% for
ABS CDOs. Non-mortgage risks are discounted within the portfolio
model based on estimates of payout patterns as well.
In view of the expected correlation between the prospective experience
of FGIC and its reinsurers, and given the recent reviews for possible
downgrade of RAM Reinsurance Company Ltd. (Aa3) and BluePoint Re
Limited (Aa3), Moody's has also, for purposes of estimating
capital adequacy, considered the sensitivity of stress-case
loss estimates to different haircuts for reinsurance credit.
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
capital needed to cover stress-case losses).
KEY RATING FACTORS -- CAPITAL ADEQUACY
Based on the risks in FGIC's portfolio, as assessed by Moody's
according to the approach outlined above, estimated capitalization
required to cover stress-case losses at the Aaa target level would
be in the range of $9 billion. This compares to Moody's
estimate of FGIC's claims paying resources of approximately $5
billion, which Moody's considers to be more consistent with capitalization
at the single-A rating level. Moody's further noted that
it estimates FGIC's insured portfolio will incur lifetime losses
on a most likely basis of approximately $2 billion in present value
FGIC is currently pursuing several capital management and restructuring
initiatives that, according to Moody's, could reduce but would
not likely eliminate the company's capital shortfall at the Aaa rating
level if successfully executed. Moody's further commented that
capitalization, and the prospect for improvements in capitalization,
were considered in the context of the rating agency's opinion about the
guarantor's ongoing business and financial profile, as summarized
KEY RATING FACTORS -- BUSINESS AND FINANCIAL PROFILE
In Moody's opinion, FGIC's significant exposure to mortgage-related
risk has had consequences for its business and financial profile beyond
the associated impact on capitalization, and affects our opinion
about FGIC's other key rating factors. Moody's believes that FGIC's
historically strong franchise, particularly in the municipal segment,
has weakened significantly relative to the other large financial guarantors,
as has its prospects for future profitability and financial flexibility.
With respect to underwriting and risk management, Moody's believes
that FGIC's relatively significant exposure to the mortgage sector
is indicative of a risk posture somewhat greater than the peer group overall
and reflects the company's aggressive portfolio growth and capital
management since its ownership change in December, 2003.
FGIC's participation in higher risk segments of direct RMBS and
ABS CDO segments in 2006 and 2007, in particular, contributed
to this view. Going forward, Moody's believes FGIC's strategic
direction may change meaningfully, introducing further uncertainty
into FGIC's credit profile.
FGIC's profitability is likely to remain depressed in the near to
intermediate term as losses on mortgage related exposures are incurred.
While Moody's expects the company will continue to earn premiums on its
inforce book for many years, as well as investment income on its
investment portfolio, we believe premium volume on new business
production will diminish significantly and operating expenses will become
a greater burden on earnings over time.
In terms of financial flexibility, FGIC, like other financial
guarantors, benefits from paying loss claims only over an extended
period of time, typically scheduled interest and principal at maturity.
Moody's has also considered in its rating review the potential for calls
on liquidity at FGIC in the context of available resources, including
the investment profile of the main operating company. FGIC's
financial leverage profile is likely to increase as incurred losses erode
shareholders' equity. In Moody's opinion, FGIC's current
access to capital is weak, as evidenced by the reluctance to date
of its investor group to commit to investing additional capital in the
company. Additional debt in the capital structure would further
increase leverage and place greater demands on the main operating company
to service fixed charges. Furthermore, weaker operating prospects
at the insurance company could result in lower earnings and cash flow
coverage, which takes on greater importance due to the tightly regulated
nature of financial guaranty insurance. For these reasons,
Moody's has widened the notching between the operating company's
insurance financial strength rating and the preferred stock rating associated
with its contingent capital securities to three notches from two.
In addition, to reflect the subordinated position of holding company
instruments, Moody's has widened the notching between the
insurance financial strength rating of the operating company and the senior
debt of the holding company to four notches from two.
CONSIDERATION OF ONGOING CAPITAL MANAGEMENT EFFORTS
Moody's is aware of a number of capital initiatives and restructuring
efforts currently being considered by FGIC. Moody's believes
the ultimate impact of these efforts on the credit profile of the financial
guarantor is uncertain, and could be negative, Moody's said,
leading to the continuation of the review for possible downgrade.
At this time, however, Moody's believes that FGIC's
business position and franchise strength are consistent with an operating
company insurance financial strength rating in the single-A range.
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 A3, from Aaa;
FGIC UK Limited -- insurance financial strength to A3,
FGIC Corporation -- senior unsecured debt to Ba1,
from Aa2; and
Grand Central Capital Trusts I-VI -- contingent capital
securities to Baa3, from Aa2.
OVERVIEW OF FGIC CORPORATION
FGIC Corporation is a holding company whose primary operating subsidiaries,
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. For the nine months ended September 30, 2007,
FGIC reported net operating income available to common shareholders of
$62.4 million. As of September 30, 2007,
FGIC had shareholders' equity of approximately $2.4
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service