Folding wrappers

On expectations of further deterioration in the insured portfolio of MBIA Insurance Corp, Moody's revised the outlook on the 'B3' insurance financial strength rating assigned to credit wrapper to negative. MBIA continues to face severe stress as a result of its exposure to ABS CDOs and RMBS securities. Moody's expected losses for ABS CDOs and RMBS now approximate 19 per cent and 14.5 per cent, respectively, of the associated par outstanding, with losses under a stress scenario materially above those levels.

The move also reflects uncertainty around the ongoing litigation challenging MBIA's recent separation of its US municipal bond guarantee business into National Public Finance Guarantee Corp. Creditors and counterparties have sued MBIA, requesting that the February 2009 restructuring of the group that led to National's capitalisation with some of MBIA Insurance Corp's resources, be reversed.   
 
With monoline insurer Ambac Assurance Corporation effectively in runoff, S&P lowered the credit ratings assigned to the insurer to 'BBB' from 'A' and left the ratings on CreditWatch with negative implications. Aligned with this view, S&P said the likelihood of the insurer continuing as an operating entity capable of writing new business had declined significantly.

S&P is now concerned that as the insurer's business book runs off, it could become concentrated, lacking sufficient sectoral diversity. In addition, the 2005-2007 vintage direct RMBS and CDO of ABS exposures are subject to continued adverse loss development that could erode capital adequacy.