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Rating Action:

Moody's downgrades MBIA's rating to A2; outlook is negative

19 Jun 2008

New York, June 19, 2008 -- Moody's Investors Service has downgraded to A2, from Aaa, the insurance financial strength ratings of MBIA Insurance Corporation (MBIA) and its affiliated insurance operating companies. In the same rating action, Moody's also downgraded the surplus note rating of MBIA Insurance Corporation to Baa1, from Aa2, and the senior debt rating of the holding company, MBIA, Inc. (NYSE: MBI) to Baa2, from Aa3. Today's rating action concludes a review for possible downgrade that was initiated on June 4, 2008, and reflects MBIA's limited financial flexibility and impaired franchise, as well as the substantial risk within its portfolio of insured exposures and a movement toward more aggressive capital management within the group. The rating agency said that while the group remains strongly capitalized, estimated to be consistent with a Aa level rating, and benefits from substantial embedded earnings in its existing insurance portfolio, these other business factors led to the lower rating outcome. Furthermore, MBIA's insured portfolio remains vulnerable to further economic deterioration, particularly given the leverage contained in its sizable portfolio of resecuritization transactions, including some commercial real estate CDOs. The outlook for the ratings is negative, reflecting the material uncertainty about the firm's strategy and the non-negligible likelihood of further adverse developments in its insurance portfolios or operations.

As a result of today's rating action, the Moody's-rated securities that are guaranteed or "wrapped" by MBIA are also downgraded to A2, except those with higher public underlying ratings. A list of these securities will be made available under "Ratings Lists" at www.moodys.com/guarantors.

Moody's said that substantial uncertainty about the ultimate performance of MBIA's mortgage related exposures continues to adversely affect market perceptions of the firm, greatly impairing its financial flexibility and ability to write new insurance. MBIA has recorded approximately $2.1 billion in cumulative loss reserves and impairments associated with its mortgage related portfolio, mostly from second lien mortgage backed securities and asset-backed CDOs (ABS CDOs). Moody's noted that, over the last few months, MBIA has written little new business, and its financial flexibility has deteriorated substantially as evidenced by the significant decline in the company's stock price and high current spreads on its debt securities, making it extremely difficult to economically address potential capital shortfalls should markets continue to worsen.

Moody's has re-estimated expected and stress loss projections on MBIA's insured portfolio, focusing on the company's mortgage-related exposures as well as other sectors of the portfolio potentially vulnerable to deterioration in the current environment. Based on Moody's revised assessment of the risks in MBIA's portfolio, estimated stress-case losses would approximate $13.6 billion at the Aaa threshold and $9.4 billion at the A2 threshold. This compares to Moody's estimate of MBIA's claims paying resources of approximately $15.1 billion. Moody's noted that its stress case estimates for MBIA's residential mortgage-related exposures increased by roughly $500 million to $5.9 billion, which was largely offset by insured portfolio amortization since year-end 2007. Relative to Moody's 1.3x "target" level for capital adequacy, MBIA is currently $2.6 billion below the Aaa target level and is $2.8 billion above the A2 target level.

The rating agency noted that MBIA's recent decision to retain at the holding company the $1.1 billion in proceeds from its most recent equity offering is indicative of a more aggressive capital management strategy, and is a negative credit consideration for the insurance company's rating. Such decision, however, puts the holding company in a strong liquidity position, said Moody's, providing additional comfort about the firm's ability to manage the effect of acceleration and collateralization in its GIC business triggered by the downgrade. MBIA has indicated that the firm does not intend to issue additional dilutive capital in the current environment and that it will review its strategic options for redeploying the holding company funds, including possible stock buybacks.

Moody's said that, beyond MBIA's affected mortgage related exposures, portfolio risks appear to be well contained as reflected by its core low-risk municipal book and high average underlying ratings. Most structured finance sectors outside of residential mortgage related products are performing well, although certain exposures, such as some commercial real estate CDOs, because of their leveraged structure and sector concentration, may be more sensitive to severe economic or sector deterioration. While portfolio losses could increase in a sharp economic downturn, strong premium accretion, investment earnings and portfolio amortization should help to offset any resulting impact on capital adequacy. Moody's noted, however, that downward rating pressure could occur if MBIA's capital position eroded through the extraction of capital or due to further increases in projected stress loss estimates.

Moody's will continue to evaluate MBIA's ratings in the context of the future performance of the company's mortgage-related exposures relative to expectations and resulting capital adequacy levels, as well as changes to the company's strategic and capital management plans as a single-A rated company. In February, MBIA announced a long-term strategic objective of separating its municipal insurance, structured insurance and asset management businesses into distinct legal entities. Moody's said that management's recent decision to retain at the holding company the $1.1 billion in proceeds from its latest equity raise suggests that the firm is contemplating a more accelerated timeframe for such transformation.

LIST OF RATING ACTIONS

The following ratings have been downgraded:

• MBIA Insurance Corporation -- insurance financial strength to A2 from Aaa, and surplus notes to Baa1 from Aa2;

• MBIA Insurance Corporation of Illinois -- insurance financial strength to A2 from Aaa;

• Capital Markets Assurance Corporation -- insurance financial strength to A2 from Aaa;

• MBIA UK Insurance Limited -- insurance financial strength to A2 from Aaa;

• MBIA Assurance S.A. -- insurance financial strength to A2 from Aaa;

• MBIA Mexico S.A. de C.V.'s -- insurance financial strength to A2 from Aaa (the firm's Aaa.mx -- national scale rating -- is affirmed);

• MBIA Inc. -- senior unsecured debt to Baa2 from Aa3, provisional senior debt to (P) Baa2 from (P) Aa3, provisional subordinated debt to (P) Baa3 from (P) A1, and provisional preferred stock to (P) Ba1 from (P) A2;

• North Castle Custodial Trusts I-VIII -- contingent capital securities to Baa2 from Aa3;

Established in 1974, MBIA 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
Stanislas Rouyer
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

Moody's downgrades MBIA's rating to A2; outlook is negative
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