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Rating Action:

Moody's downgrades MBIA to Baa1; outlook is developing

07 Nov 2008
Moody's downgrades MBIA to Baa1; outlook is developing

New York, November 07, 2008 -- Moody's Investors Service has downgraded to Baa1 from A2 the insurance financial strength rating of MBIA Insurance Corporation ("MBIA") and supported insurance companies. In the same rating action, Moody's downgraded the debt ratings of MBIA, Inc. (NYSE: MBI -- senior unsecured debt to Ba1 from Baa2) and related financing trusts. Today's rating action concludes a review for possible downgrade that was initiated on September 18, 2008, and reflects Moody's view of MBIA's diminished business and financial profile resulting from its exposure to losses from US mortgage risks and disruption in the financial guaranty business more broadly. The outlook for the ratings is developing.

As a result of today's rating action, the Moody's-rated securities that are guaranteed or "wrapped" by MBIA are also downgraded to Baa1, except those with higher public 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. Second is the possibility of even greater than expected losses in extreme stress scenarios, with losses possibly reaching sectors beyond mortgage related exposures as corporate and other consumer credits face a more challenging economic environment, and given the leverage contained in MBIA's sizable portfolio of resecuritization transactions, including some commercial real estate CDOs. Third is Moody's view of the company's diminished business prospects as reflected in its substantially reduced participation in the primary financial guaranty market in 2008. Fourth is the company's limited financial flexibility.

In its 3Q2008 earnings release, MBIA reported increased case loss reserves of $961 million related to direct RMBS exposures, and $66 million in credit-related impairments on credit default swaps referencing ABS CDOs. The company's loss reserves on direct insured RMBS exposures are now broadly consistent with Moody's revised expectations, while MBIA's credit-related impairments on ABS CDOs are approximately $1.5 billion below Moody's current expectations. The increase in loss reserves has adversely affected the firm's regulatory capital; at 3Q2008, MBIA's policyholders' surplus was approximately $3.3 billion and contingency reserves were approximately $2.9 billion.

MBIA's Baa1 insurance financial strength rating reflects the rating agency's view that MBIA's aggregate resources (including statutory contingency reserves and contingent capital) provide a substantial capital cushion above expected loss levels. The company has access to sufficient sources of liquidity to meet the needs of its asset management business, including the liquidity needs stemming from investment agreement terminations or collateral posting requirements, added Moody's. The recently completed reinsurance of FGIC's municipal portfolio adds premium income for MBIA during a time of limited new business activity.

Moody's stated that the developing outlook reflects both the potential for further deterioration in the insured portfolio as well as 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, as well as 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's ratings in the context of the future performance of the company's 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. Should MBIA's capital position deteriorate materially beyond the effect of a possible $1.5 billion increase in ABS CDO credit-related impairments (in line with Moody's expected loss estimates), there could be further negative pressure on the firm's ratings.

LIST OF RATING ACTIONS

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

MBIA Insurance Corporation -- insurance financial strength at Baa1, from A2, and surplus notes at Baa3, from Baa1;

MBIA Insurance Corporation of Illinois -- insurance financial strength at Baa1, from A2;

Capital Markets Assurance Corporation -- insurance financial strength at Baa1, from A2;

MBIA UK Insurance Limited -- insurance financial strength at Baa1, from A2;

MBIA Assurance S.A. -- insurance financial strength at Baa1, from A2;

MBIA Mexico S.A. de C.V.'s -- insurance financial strength at Baa1, from A2 (national scale insurance financial strength at Aaa.mx, remains under review for possible downgrade);

MBIA Inc. -- senior unsecured debt at Ba1, from Baa2, provisional senior debt at (P) Ba1, from (P) Baa2, provisional subordinated debt at (P) Ba2, from (P) Baa3, and provisional preferred stock at (P) Ba3, from (P) Ba1;

North Castle Custodial Trusts I-VIII -- contingent capital securities at Ba1, from Baa2.

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

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