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21 Nov 2008
Moody's downgrades FSA to Aa3 from Aaa, with developing outlook
New York, November 21, 2008 -- Moody's Investors Service has downgraded to Aa3 from Aaa the insurance
financial strength rating of Financial Security Assurance, Inc.
(FSA) and supported insurance companies. In the same rating action,
Moody's downgraded the debt ratings of Financial Security Assurance Holdings,
Ltd. (senior unsecured debt to A3 from Aa2) and related financing
trusts. Today's rating action reflects Moody's view of FSA's diminished
business and financial profile resulting from its exposure to losses on
US mortgage risks and disruption in the financial guaranty business more
broadly. The rating action concludes a review for possible downgrade
that was initiated on July 21, 2008. The company's
rating outlook is developing.
As a result of today's rating action, the Moody's-rated
securities that are guaranteed or "wrapped" by FSA are also
downgraded to Aa3 under review direction uncertain, except those
with higher published underlying ratings (and for structured finance securities,
except those with higher published or unpublished underlying ratings).
A list of these securities will be made available under "Ratings
Lists" at www.moodys.com/guarantors.
The downgrade results from four primary factors. First is Moody's
expectation of greater losses on mortgage related exposure, reflecting
continued adverse delinquency trends and the likelihood of material losses
stemming from FSA's second lien and Alt-A portfolios,
as well as the risk of further losses in its mortgage portfolio should
conditions worsen. Second is the negative impact of these higher
loss expectations on FSA's capital position, despite recent
capital infusions from parent Dexia and the announced plan by the French
and Belgian governments to support FSA's financial products segment.
Third is Moody's view that the operating environment for financial
guaranty insurers, including FSA, has fundamentally changed
over the past year, with fewer new business opportunities and weaker
confidence in the industry overall. Fourth is FSA's loss
of prospective support from its government-supported banking parent
Dexia, although the recently announced acquisition of FSA's
financial guaranty business by Assured Guaranty Ltd. (Assured Guaranty)
should provide an alternative source of support assuming the transaction
closes as planned. The rating agency added that the acquisition
of FSA by Assured Guaranty would create a combined entity with substantial
financial resources and a strong market position.
Moody's said that the developing rating outlook for FSA reflects
both (a) potential positive movement in the company's financial
and business profile post-acquisition assuming FSA is capitalized
and positioned as an ongoing writer of high-quality financial guaranty
insurance within the group; and (b) potential negative rating pressure
should the acquisition fail to close or should Assured Guaranty pursue
a different strategy for FSA. Additionally, Moody's
noted that FSA currently retains substantial exposure to contingent liquidity
risk associated with its financial products business, although this
risk will be eliminated once the announced support from the French and
Belgian governments becomes effective.
In Moody's view, the level of demand for financial guaranty
insurance over the near-to-medium-term is less certain
than in the past, which has negative implications for the strength
and stability of FSA's business franchise. While there continues
to be a market for municipal bond insurance, Moody's said
that prospective opportunities in the municipal sector may be narrower
than in the past given changing perceptions about municipal risk among
buyers, lower confidence in the financial guaranty industry broadly
and a trend toward alternative forms of execution, including the
issuance of uninsured paper. Moody's noted, however,
that while the financial guaranty industry's importance within the
US municipal market has declined overall, FSA's relative competitive
position in these markets has been favorably affected by its position
as one of three primary financial guarantors with limited exposure to
higher risk ABS CDOs.
Moody's also believes that customer demand may be inherently unstable,
with a very sharp fall-off in demand likely to result from even
moderate declines in a guarantor's credit profile. This susceptibility
to changes in credit risk profile creates a "demand cliff"
beyond that observed in most other industries. Furthermore,
the extreme sensitivity of a financial guarantor's franchise value
to changes in its risk profile also affects financial flexibility,
where even the best positioned firm could experience a dramatic constriction
of financing options if material losses were to develop.
FSA's Aa3 insurance financial strength rating reflects Moody's view
that the guarantor's aggregate resources (including statutory contingency
reserves and contingent capital) provide a very substantial capital cushion
above expected loss levels. Moreover, the announced French
and Belgian government support of FSA's financial products business
will, once in place, free-up capital resources and
eliminate liquidity concerns stemming from potential investment agreement
terminations or collateral posting requirements. FSA's disciplined
underwriting strategy and active participation in the municipal market
have resulted in a generally high-quality and diversified insured
portfolio beyond the firm's mortgage-related exposures.
Most non-mortgage exposures are performing well, although
the insured portfolio is exposed to transaction or sector deterioration,
especially in light of the increased risk of a prolonged and deep recession.
On November 20, 2008, Moody's released a report titled
"The Changing Business of Financial Guaranty Insurance."
The report, which can be accessed on Moodys.com, explores
the above mentioned industry challenges and vulnerabilities in the context
of Moody's financial guaranty rating methodology.
LIST OF RATING ACTIONS
The following ratings have been downgraded:
Financial Security Assurance Inc. -- insurance financial
strength to Aa3, from Aaa;
Financial Security Assurance (U.K.) Limited --
insurance financial strength to Aa3, from Aaa;
Financial Security Assurance Intl Ltd. -- insurance
financial strength to Aa3, from Aaa;
Financial Security Assurance Holdings Ltd. -- senior
unsecured debt to A3, from Aa2, junior subordinated debt at
Baa1, from Aa3, provisional senior debt to (P) A3, from
(P)Aa2, provisional subordinated debt to (P)Baa1, from (P)Aa3,
and provisional preferred stock to (P)Baa2, from (P)A1;
FSA Seguros Mexico S.A. de C.V. --
insurance financial strength to Aa3, from Aaa (the firm's Aaa.mx
national scale rating was affirmed); and
Sutton Capital Trusts I, II, III and IV -- contingent
capital securities to A3, from Aa2.
Financial Security Assurance, Inc. is the main operating
company of Financial Security Assurance Holdings Ltd. and the parent
of other wholly-owned financial guaranty insurers in a stacked
structure. FSA Holdings is a subsidiary of Dexia Credit Local (senior
debt at Aa3, BFSR at C-, under review for downgrade),
which is the largest operating company within the Dexia Banking Group.
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service
No Related Data.
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