NEW YORK (Reuters) – MBIA Inc said on Thursday it would have the cash to meet commitments even after reporting a worse-than-expected loss, but rating agencies kept the pressure on the world’s largest bond insurer with a series of actions and warnings late in the day.
U.S. bond insurers’ shares staged a comeback after MBIA held a marathon conference call to reassure investors. U.S. government bonds rose on a wave of safe-haven buying following a rating agency cut of an MBIA rival.
Speculation about looming cuts in credit ratings for bond insurers has battered the U.S. stock market in recent sessions.
Late on Thursday, Moody’s Investors Service warned that the amount of capital needed to support the mortgage-related risks of bond insurers has grown significantly and some bond insurers may not be able to support their “Aaa” ratings. Moody’s expects to conclude a review of the industry by mid- to late-February.
Rival rating agency S&P cut its ratings on smaller MBIA competitor FGIC Corp’s bond insurance arm, and placed its top ratings on MBIA on review for a possible downgrade. S&P also said it may cut the “AAA” rating of XL Capital Assurance Inc, the bond insurance arm of Security Capital Assurance.
S&P cut Financial Guaranty Insurance Co’s “AAA” insurer financial strength rating by two notches to “AA” and cut parent FGIC’s long-term rating by three notches to “A” from “AA.”
Bond insurers have moved center stage in a credit crisis that began last summer after defaults soared on U.S. subprime mortgages, causing losses for banks, funds and insurers.
The bond insurers have guaranteed municipal and consumer debt worth about $2.4 trillion, of which about $900 million is “structured finance” debt, including mortgage bonds held in collateralized debt obligations (CDOs).
Fears about the U.S. credit situation have spread across the globe. Soured bets on investments tied to U.S. subprime mortgages have cost Japan’s top three banks $4.7 billion so far, and analysts predict more pain ahead.
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THE LOSSES
Just after midnight on Thursday, MBIA reported a loss of $2.3 billion, or $18.61 a share, versus a profit of $181 million, or $1.32 a share, a year earlier. On an operating basis, MBIA lost $3.30 a share, wider than the Wall Street expectation of $2.97, according to Reuters Estimates.
MBIA is writing down $3.5 billion in its credit derivatives portfolio, including a $200 million credit impairment. It also set aside $713.5 million, including $100 million for an unallocated loss reserve for MBIA’s prime, second-lien mortgage exposure.
Despite the poor results, investors were cheered by MBIA’s declaration it could raise new cash to meet its commitments.
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THE QUIZ SHOW
Many of the most contentious points were raised by William Ackman of hedge fund Pershing Square Capital Management, who claimed in a letter on Wednesday that Ambac and MBIA face combined losses topping $23 billion from bonds they insured. He said the companies should be forced to stop paying dividends.
Pershing Square has shorted Ambac and MBIA shares, meaning it will profit if the stock drops. Company officials specifically disputed his claims.
MBIA called Ackman’s model “a black box,” containing “extreme assumptions” that produced desired results. They added that the model does not account for cash flow and required payments on deals in which the insurer might participate.
MBIA, which guarantees municipal bonds and repackaged consumer debt, said it sold $1 billion in surplus notes to boost its capital levels earlier this month.
Chief Executive Gary Dunton said the measures would offset the cash it needed to set aside during the quarter.
The company also said it would raise more cash as needed.
Chief Financial Officer C. Edward Chaplin said on the call that MBIA would continue to work with Moody’s to keep its triple-A rating and believes the outcome of a Moody’s review will be “affirmative.”
S&P’s actions came a day after the rating agency said total losses for financial institutions from continuing mortgage market problems will eventually total more than $265 billion.
Some wider market data on the municipal market could also raise concerns about MBIA and the bond insurance industry.
On Thursday, Thomson Financial said U.S. municipal bond volume dropped 47 percent in January from a year earlier and that only 32 percent of all securities sold this month were insured compared with more than half guaranteed a year ago.
But Chaplin said MBIA’s outlook is not that dire.
“There is no scenario that we can identify that would result in MBIA becoming insolvent, having a liquidity event or being intervened with by the regulator, and experiencing a default of any kind,” the CFO said.
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