bond insurers face downgrades pressure

For a fee, monoline insurers lend their high credit ratings to less creditworthy borrowers to help them gain access to investor capital at cheaper levels. If the issuer defaults, the insurer agrees to make the interest payments over the lifetime of the bond and to repay the debt at maturity. Based on preliminary reviews, both Moody’s and Fitch said CIFG was highly likely to fall below their capital adequacy requirements due to relatively high exposure to CDOs backed by mortgages. Fitch affirmed CIFG’s AAA ranking after the French banks took control, while Moody’s said the rescue “greatly reduces the risk” that CIFG’s capital will fall below the amount needed for the top rating. The CIFG bail-out may help to set the tone for other bond insurers as they seek to avert a downgrade, but unlike CIFG, most monolines do not have a big banking parent to fund a bail-out. Downgrades of the bond insurers could have serious consequences for investors who own the $2,400bn of bonds the insurers guarantee, which will in turn suffer downgrades and further drops in market value. The consequences could be particularly acute in the case of ACA, because, unlike other insurers, ACA has to post collateral against its derivatives trades if it gets downgraded. This is in part because ACA, rated A, is one of the only bond insurers that operates with a rating below AAA. S&P began reviewing ACA’s rating for downgrade this month after the company posted a $1.04bn third-quarter loss.