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24 Oct 2008
Moody's downgrades Syncora Guarantee to Caa1; rating on review with direction uncertain
New York, October 24, 2008 -- Moody's Investors Service has downgraded to Caa1, from B2,
the insurance financial strength ratings of Syncora Guarantee Inc.
("SG" -- formerly XL Capital Assurance Inc.),
and Syncora Guarantee (U.K.) Ltd., with the
ratings placed on review with direction uncertain. In the same
rating action, Moody's downgraded the provisional senior unsecured
shelf rating of Syncora Holdings Ltd. ("Syncora") to
(P)Ca from (P)Caa3 and the rating of Twin Reefs Pass-Through Trust
("Twin Reefs") to Ca from Caa2, with the ratings of
both issuers placed on review with direction uncertain. Moody's
has also downgraded to Caa1, from B2, the insurance financial
strength rating of Syncora Guarantee Re Ltd. ("SG Re"
-- formerly XL Financial Assurance Ltd), and will withdraw
the rating as a result of its recent merger into SG. Prior to today's
rating action, the ratings of SG and SG Re were on review for possible
upgrade, the ratings of Syncora had a negative outlook and the rating
of Twin Reefs was on review with direction uncertain.
According to Moody's, today's rating action reflects
both Moody's expectation of higher mortgage-related losses
arising from Syncora's insured portfolio, as well as the possibility
that ongoing settlement negotiations with CDS counterparties regarding
ABS CDO exposures could result in a comprehensive agreement for the termination
of troubled exposures. If Syncora is able to reach a favorable
settlement, remaining SG policyholders would likely benefit from
an improved credit profile at the company. However, Moody's
believes that the terms of any such settlement would likely be consistent
with a distressed exchange for settling CDS counterparties. For
this reason, Moody's has downgraded SG's insurance financial
strength rating, with the ratings on review with direction uncertain,
to reflect the wide range of potential outcomes resulting from Syncora's
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 a)
the rating of the guarantor (if rated at the investment grade level),
or b) the published underlying rating. In accordance with current
rating agency policy, following Moody's June 20, 2008
rating action on SG which lowered its rating to below the investment grade
level, Moody's withdrew ratings on SG-wrapped securities
for which there was no published underlying rating. Should the
guarantor's rating subsequently move back into the investment grade
range or should the agency subsequently publish the associated underlying
rating, Moody's would reinstate previously withdrawn ratings on
those wrapped instruments. For further information please see Moody's
special comment entitled: Assignment of Wrapped Ratings When Financial
Guarantor Falls Below Investment Grade (May, 2008).
Regarding Syncora's insured portfolio, Moody's expects
further stress on the company's risk-adjusted capital position
in light of continued deterioration in housing fundamentals and the related
implications on the company's mortgage-related exposures.
Higher expected mortgage default rates and severity were reflected in
upward revisions to Moody's lifetime loss estimates for certain
recent vintage residential mortgage-backed securities announced
Moody's said that its review of SG's insurance financial strength
rating will update its assessment of the guarantor's mortgage-related
exposures and other insured transactions. Moody's stated
that because SG is meaningfully exposed to the risk of US subprime mortgages
and other residential mortgage products, its updated mortgage loss
assumptions are expected to have a significant impact on estimates of
the firm's capital adequacy, which had recently shown signs
of improvement following the $1.8 billion settlement with
former parent, XL Capital Ltd, and the commutation of certain
credit default swaps on ABS CDO exposures with Merrill Lynch.
According to Moody's, the ratings review will also focus on
the result of ongoing negotiations with CDS counterparties regarding the
commutation of remaining ABS CDO exposures at the company. Moody's
notes that Syncora has earmarked $820 million from its settlement
with XL Capital Ltd for the purpose of commuting, terminating,
amending or restructuring existing agreements with certain CDS bank counterparties.
To the extent Syncora is able to commute these exposures at a reasonable
price, SG's insurance financial strength rating would likely
be upgraded, but any upward rating revision would likely result
in a non-investment grade rating given the continued uncertainty
with respect to Syncora's remaining mortgage-related exposures
and, in Moody's opinion, impaired franchise.
Conversely, Syncora's inability to adequately mitigate the
potential for further losses on these contracts through negotiated settlements
within a reasonable timeframe could result in a confirmation of the rating
or a further downgrade, depending on Moody's view of capital
adequacy at the firm at the conclusion of our ratings review.
The downgrades of the ratings on Twin Reefs and Syncora's provisional
senior unsecured shelf registration were prompted by the likelihood that
future dividend payments on Twin Reefs will be omitted, as well
as the absence of unrestricted dividend capacity at SG. Moody's
anticipates that any improvement in SG's capital adequacy profile
achieved through the commutation or termination of troubled mortgage-related
exposures will have only a moderate impact on the credit profile of the
holding company over the near to medium term.
LIST OF RATING ACTIONS
The following ratings have been downgraded and placed on review with direction
Syncora Guarantee Inc. -- insurance financial strength to
Caa1 from B2;
Syncora Guarantee (U.K.) Ltd. -- insurance financial
strength to Caa1 from B2;
Syncora Holdings Ltd. -- provisional rating on senior debt
to (P)Ca from (P)Caa3;
Twin Reefs Pass-Through Trust -- contingent capital securities
to Ca from Caa2.
The following ratings have been placed on review with direction uncertain:
Syncora Holdings Ltd. -- provisional rating on subordinated
debt at (P)Ca and preference shares at Ca.
The following rating has been downgraded and will be withdrawn:
Syncora Guarantee Re Ltd -- insurance financial strength to Caa1
Syncora Holdings Ltd. (formerly Security Capital Assurance Ltd)
is a Bermuda-domiciled holding company whose primary operating
subsidiary, Syncora Gurantee Inc. (formerly XL Capital Assurance
Inc.) provides credit enhancement and protection products to the
public finance and structured finance markets throughout the United States
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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