CIFG, a small and privately-owned bond insurer, is at risk of losing its top-notch credit rating after Moody’s put the company on review for possible downgrade.
The ratings action was made despite a $1.5bn injection from Banque Populaire and Caisse d’Epargne, CIFG’s parents, in November last year. That injection doubled the company’s capital base to $3bn.
But Moody’s said the continued deterioration in the US mortgage markets and the potential for losses on subprime-exposed securities had hurt CIFG’s capital position in spite of the significant injection.
Bond insurers, or monolines, such as CIFG guarantee the repayment of principal and interest on the securities they have insured.
In recent months, the sector has attracted intense scrutiny because of its exposure to the stricken subprime mortgage markets.
CIFG, as a relatively small operator in the industry, has insured about $95bn of bonds, the bulk of which are structured financial products such as CDOs, company data show.
A downgrade could spark fire sales of securities insured by CIFG, as well as declines in their value.
The warning by Moody’s also adds to the pressure on industry leaders MBIA and Ambac, who are at risk of losing their triple-A ratings because of their exposure to subprime-tainted securities.
Moody’s last month increased its mortgage loss estimates, “which, for CIFG, has resulted in a capital adequacy profile that now falls below our Aaa target-level benchmark”, the ratings agency said. “The rating action reflects the weakened capital profile of the group as a result of its mortgage and mortgage-related collateralised debt obligation exposures (CDOs), as well as uncertainty over CIFG’s future strategic direction.”
Moody’s expects to complete its review of CIFG’s rating in the next two weeks. The review will focus on assessing the firm’s plans to further strengthen its capital base as well as on its future strategy.
In response, CIFG said it was “continuing to work closely with Moody’s and is exploring all of its options”.
The ratings agency also stripped Channel Reinsurance, which provides reinsurance of policies written by bond insurer MBIA, of its triple-A rating yesterday.
The three-notch downgrade to “Aa3” may negatively impact the value of the reinsurance policies it has written for MBIA, its only customer, Moody’s said.
Moody’s expects Channel Re’s insurance policies to incur losses of $230m compared with its current claims-paying ability of about $930m.