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Rating Action:

Moody's downgrades MBIA Insurance Corp to B3; places Baa1 rating of MBIA Illinois on review for possible upgrade

18 Feb 2009

New York, February 18, 2009 -- Moody's Investors Service has downgraded to B3 from Baa1 the insurance financial strength ratings of MBIA Insurance Corporation and its supported subsidiaries (collectively MBIA Corp). The outlook for the ratings is developing. Moody's also placed the Baa1 rating of MBIA Insurance Corporation of Illinois (MBIA Illinois) on review for possible upgrade. These rating actions follow MBIA's announcement that it has segregated its municipal and non-municipal financial guaranty exposures into two separately capitalized operating companies.

Today's rating actions have implications for the various transactions wrapped by MBIA Corp and MBIA Illinois as discussed later in this press release.

TRANSACTION OVERVIEW

Earlier today, MBIA announced the restructuring of its financial guaranty insurance operations following the approval of the New York and Illinois insurance regulators. According to Moody's, MBIA's restructuring involves the segregation of its financial guaranty insurance operations into two separately capitalized sister companies, with one entity (MBIA Illinois) assuming the risk associated with its US municipal exposures, and with the other (MBIA Corp) insuring the remainder of the portfolio, including all international and structured finance exposures.

Under the terms of the transaction, MBIA Illinois (which is expected to be renamed National Public Finance Guarantee Corporation) has provided cut-through reinsurance on all of MBIA Corp's existing portfolio of US municipal credits through a 100% quota-share agreement, including the municipal exposure that MBIA Corp assumed from FGIC. To support its ability to pay claims, MBIA Illinois has received a $2.1 billion capital infusion sourced through a dividend from MBIA Corp, in addition to $2.9 billion in net unearned premiums (net of ceding commissions) and loss and loss adjustment expense reserves associated with the municipal portfolio. Post transaction, MBIA Illinois has approximately $537 billion in municipal net par outstanding and $5.7 billion in hard capital, while MBIA Corp has $240 billion in net par exposure and approximately $9.8 billion in hard capital (based on 3Q08 financial results).

RATING RATIONALE FOR MBIA INSURANCE CORPORATION

The downgrade of MBIA Corp to B3, from Baa1, reflects two primary factors. First is the guarantor's substantial reduction in claims-paying resources relative to the remaining higher-risk exposures in its insured portfolio, given the removal of capital, and the transfer of unearned premium reserves associated with the ceding of its municipal portfolio to MBIA Illinois. Second is the continued deterioration of the firm's insured portfolio of largely structured credits, with stress reaching sectors beyond residential mortgage-related securities.

Moody's recently published several Special Reports discussing the deteriorating credit profile of Alt-A mortgage-backed securities, corporate CDOs, and CMBS -- all of which are negatively affecting MBIA Corp's risk-adjusted capital adequacy. The rating agency noted that the claims-paying resources of MBIA Corp post restructuring are roughly equivalent to Moody's expected loss estimates for the entity.

Moody's stated that MBIA Corp's developing outlook reflects the potential for further deterioration in the insured portfolio. It also incorporates positive developments that could occur over the near to medium term, including greater visibility about mortgage performance, the possibility of commutations or terminations of certain ABS CDO exposures, and/or successful remediation efforts on poorly performing RMBS transactions.

The company's developing outlook is also based on the potential for various initiatives being pursued at the US federal level to mitigate the rising trend of mortgage loan defaults. Moody's will continue to evaluate MBIA Corp's ratings in the context of the future performance of its insured portfolio relative to expectations and resulting capital adequacy levels, as well as changes, if any, to the company's strategic and capital management plans.

RATING RATIONALE FOR MBIA INSURANCE CORPORATION OF ILLINOIS

The review for upgrade of MBIA Illinois' Baa1 insurance financial strength rating reflects upward rating pressure following the group's restructuring, stemming from the company's substantial claims-paying resources relative to its insured portfolio of high-quality municipal exposures. The review also includes the possibility of improved business prospects for MBIA Illinois in light of the company's municipal-only focus and strong risk-adjusted capital adequacy.

Moody's said that the potential for upward rating movement is tempered, however, by the significant challenges facing both MBIA Illinois and the financial guaranty industry in general. According to the rating agency, there continues to be a market for municipal bond insurance, but 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. For these and other reasons, Moody's noted that any upward rating revision would likely be limited to the single-A range.

During its review, Moody's will evaluate the impact of MBIA's restructuring on the future business prospects of MBIA Illinois. As part of the review process, Moody's will consider the company's ability to regain market confidence, as well as the potential for and impact of any legal challenges coming from the counterparties of MBIA Corp.

RATING RATIONALE FOR MBIA INC

The affirmation of MBIA Inc.'s Ba1 senior debt rating and maintenance of its developing outlook reflect the group's evolving risk profile. The corporate restructuring may strengthen MBIA Inc.'s risk profile by sheltering its investment in MBIA Illinois from the risks of MBIA Corp. The creation of a strongly capitalized and dedicated municipal insurer also increases the likelihood of regaining market traction. At the same time, continued deterioration in the group's structured finance portfolio, as well as uncertainty about the group's ability to firewall losses within MBIA Corp, could hurt MBIA Inc.'s credit profile.

TREATMENT OF WRAPPED TRANSACTIONS

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 the following: a) the rating of the guarantor (if rated at the investment grade level); or b) the published underlying rating (and for structured securities, the published or unpublished underlying rating). Moody's approach to rating wrapped transactions is outlined in Moody's special comment entitled "Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment Grade" (May, 2008); and Moody's November 10, 2008 announcement entitled "Moody's Modifies Approach to Rating Structured Finance Securities Wrapped by Financial Guarantors".

In light of today's downgrade of MBIA Corp to below the investment grade level, Moody's will position the ratings of all structured transactions wrapped by MBIA Corp at the higher of the underlying rating of the structured security -- regardless of whether the underlying rating is published or not -- and MBIA Corp's B3 rating.

With respect to municipal obligations wrapped by MBIA Corp that are reinsured by MBIA Illinois, Moody's is in the process of reviewing the Reinsurance Agreement between MBIA Illinois and MBIA Corp and other documentation to determine whether it is appropriate to assign the insurance financial strength rating of MBIA Illinois to these obligations. We will issue further guidance on our approach to rating these securities in the near future.

For all other transactions wrapped by MBIA Corp, Moody's will withdraw the ratings for which there are no published underlying ratings in accordance with current rating agency policy. For these transactions, if the rating of MBIA Corp should subsequently move back into the investment grade range, or if the agency should subsequently publish the underlying rating, Moody's would reinstate the rating to the wrapped instruments.

Because of the large volume of rating changes resulting from today's actions, it may take some time for Moody's to update impacted ratings in our ratings database.

LIST OF RATING ACTIONS

The following ratings have been downgraded, with a developing outlook:

MBIA Insurance Corporation -- insurance financial strength to B3, from Baa1; surplus notes to Caa2, from Baa3; and preferred stock to Caa3, from Ba2;

Capital Markets Assurance Corporation -- insurance financial strength to B3, from Baa1;

MBIA UK Insurance Limited -- insurance financial strength to B3, from Baa1;

MBIA Mexico S.A. de C.V. -- insurance financial strength to B3, from Baa1; and national scale insurance financial strength to B1.mx, from Aa1.mx;

MBIA Assurance S.A. -- insurance financial strength to B3, from Baa1. The rating of MBIA Assurance S.A. will be withdrawn to reflect its absorption by MBIA UK Insurance Limited. All assets and liabilities of MBIA Assurance S.A., including all of its outstanding financial guaranty insurance policies, have been transferred to MBIA UK Insurance Limited.

The following rating has been placed under review for possible upgrade:

MBIA Insurance Corporation of Illinois -- Baa1 insurance financial strength.

The last rating action was on December 23, 2008 when Moody's assigned Ba2 ratings to the preferred stock of MBIA Insurance Corporation.

The principal methodology used in rating MBIA was Moody's Rating Methodology for the Financial Guaranty Insurance Industry, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating MBIA can also be found in the Credit Policy & Methodologies directory.

OVERVIEW OF MBIA

MBIA Inc. (NYSE: MBI) provides financial guarantees to issuers in the municipal and structured finance markets in the United States, as well as internationally. MBIA also offers various complementary services, such as investment management and municipal investment contracts.

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

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

Moody's downgrades MBIA Insurance Corp to B3; places Baa1 rating of MBIA Illinois on review for possible upgrade
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