The rating agency had both bond insurers on a negative outlook before todays action.
Weve been observing a number of indicators that we are continually building into our analysis, said Jack Dorer, managing director at Moodys. Our view evolves as new information in the market comes about.
The action reflects Moodys concerns about the bond insurers exposure to second-lien mortgages, as well as their inability to write new business and the fact that the market has not gained renewed confidence in the health of the companies, Dorer said. Low stock prices and widening spreads on credit default swaps tied to the bond insurers parents, MBIA and Ambac Financial Group Inc., led in part to the actions.
Moodys said the review was most likely to lead to a downgrade of MBIA to Aa from Aaa, with the potential to fall as far as single-A, while the Ambac review would likely result in a downgrade to Aa.
It is not surprising in the current environment that they have not been able to write business, but the ability to write business is a key part of maintaining a triple-A rating, Dorer said.
MBIA Chief Executive Officer Jay Brown took umbrage at the action, saying it reflects the rating agencys changing requirements for Aaa ratings. In a conference call with reporters after the announcement, Brown said the company was alerted to the impending action about 30 minutes before it was made public.
When Moodys affirmed our rating with a negative outlook in February, we believed that it would refrain for six to 12 months from taking additional ratings actions unless the environment or MBIAs position changed materially, Brown said. Since then, there have been no materials adverse changes in the environment, and we believe our capital position has improved.
Moodys also referenced Ambacs falling stock price and widening CDS spreads as evidence that it will be increasingly difficult for the company to raise needed capital. And as Brown did, Ambac CEO Michael Callen also expressed disappointment. He said Ambac has presented Moodys with a plan to use its already-licensed subsidiary, Connie Lee Insurance Co., to serve the municipal market.
The timing of Moodys announcement is unfortunate sin ewe believe that the uncertainty surrounding Ambac is temporary, Callen said.
Outside the mortgage-related exposures, the remainder of our portfolio is performing well, and in line with our expectations.
Moodys said the difficulty for both bond insurers to regain market confidence in their ratings, in light of unknown future losses in mortgage-related securities or resulting from the U.S. economic downturn, led to the review.
The announcement may cause MBIA to hasten plans to restructure itself into separate entities, one to write structured finance business and the other to write municipal business, Brown said in the call.