Credit wrappers under rating pressure again

Offshore, S&P again lowered the insurer financial strength rating assigned to credit wrapper, Financial Guaranty Insurance Co to 'CCC' from 'BB' and removed the rating from CreditWatch with negative implications. A negative outlook was assigned.

S&P said current loss estimates for exposure to 2005-2007 vintages of subprime and second-lien mortgages and related collateralised debt obligations of asset-backed securities remain in excess of claims paying resources. While loss estimates have declined due to commutation success for several transactions, the potential for regulatory intervention remains.

We note that Moody's downgraded the insurance financial strength ratings assigned to credit wrappers, Financial Security Assurance and Assured Guaranty Corp., to 'Aa3' from 'Aaa', the week before last. This was due to their diminished business and financial profiles resulting from exposure to losses on US mortgage risks and disruption in the financial guarantee business more broadly.

In a sign of how tough conditions are becoming in the automotive industry, Fitch has become the first rating agency to downgrade the triple-A ratings assigned to Toyota Motor Corporation. After placing Toyota's rating on Rating Watch Negative two weeks ago, Fitch lowered the rating last week to 'AA' with a negative outlook. "In Fitch's view, the negative developments in the industry are so substantial and fundamental, that even the strongest player - Toyota - can no longer support a 'AAA' rating."

Finally, on a positive note, Fitch affirmed the 'A/F1' ratings assigned to Morgan Stanley (MS) and amended the outlook to stable from negative. Fitch noted that MS has demonstrated its ability to manage through very difficult markets, raising capital from government programs and from private investors, and that balance sheet deleveraging is improving liquidity and capital ratios.

While profitability is expected to remain weak and highly variable, reduction in staff is expected to return the company to moderate levels of profitability over the intermediate term. Fitch also considers Morgan Stanley to be a survivor that would receive additional government support if needed.