Thursday, January 31, 2008

Oh dear me – looks like a bold piece of defensive analysis

Detailed Results Of Subprime Stress Tests for Financial Guarantors

The financial strength ratings of the following companies have been affirmed but assigned a negative outlook:Ambac Assurance Corp., MBIA Insurance Corp., and XL Capital Assurance Inc. and XL Financial Assurance Ltd.We have affirmed the financial strength ratings of CIFG Guaranty, CIFG Europe and CIFG Assurance North America Inc. all of which remain on negative outlook. The financial strength rating on ACA Financial Guaranty Corp. has been lowered to 'CCC' and is placed on CreditWatch Developing.Finally, the 'AAA' financial strength rating of Financial Guaranty Insurance Co. is placed on CreditWatch with negative implications.However, the results of the stress test have led to the affirmation of the financial strength ratings of Financial Security Assurance Inc., Assured Guaranty Corp.

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  • Company-Specific Comments

    Ambac Assurance Corp.

    We affirmed the ‘AAA’ financial strength and financial enhancement ratings of Ambac Assurance and the ‘AA’ debt
    ratings of Ambac Financial Group, Inc. but the outlooks have been changed to negative. The rating affirmations
    reflect the fact that Ambac’s adjusted capital cushion of between $1,750 and $1,800 million is in line with its
    modeled stress losses. The announced reinsurance transaction with Assured Guaranty Re Ltd. was an important
    addition for Ambac, adding approximately $250 million on a risk adjusted basis to its capital cushion. The negative
    outlooks reflect the potential for further mortgage market deterioration relative to the company’s marginally
    adequate capital cushion.

    Assured Guaranty Corp.

    We affirmed the financial strength rating based on the low level of stress losses relative to the company’s cushion of
    $250 million to $300 million. The relatively low stress losses are due to the fact that almost 80% of non-prime
    RMBS exposure, originally totaling $17.5 billion, has underlying ratings of ‘AAA’. Correspondingly, its CDOs with
    U.S. nonprime RMBS exposure total only $448 million, and were structured to super senior protection levels.

    CIFG Financial Guaranty

    We have affirmed the ‘AAA’ financial strength rating of CIFG and the outlook remains negative. To support CIFG’s
    claims-paying resources Banque Federale des Banques Populaires (BFBP) and Caisse Nationale des Caisses d’Epargne
    (CNCE) reportedly will contribute on an equal basis a total of $1.5 billion in capital resources to CIFG Holding.
    The contribution will be in the form of equity of $1.3 billion and soft capital of $200 million. BFBP and CNCE will
    also acquire 99.99% of CIFG holding from Natixs S.A. CIFG Holding is currently owned by Nataxis S.A. BFVP
    and CNCE each own equal (34.44%) stakes in Natixis S.A., with the remaining shares owned by the public.
    Successful completion of the capital plan may result in the company satisfactorily addressing Standard & Poor’s concerns relating to its capital adequacy.
    CIFG’s outlook was changed to negative from stable in June 2007 for reasons unconnected to its subprime
    exposure. Rather, we looked at the effectiveness and processes of the company’s board, appropriate succession
    planning, and the degree of long-term support to be provided by its parent Natixis S.A. The assignment of the
    negative outlook also reflected our views relating to CIFG’s below-average earnings and ROE. Nevertheless, we
    consider the $1.5 billion capital contribution to be an important statement by CNCE and BFBP about their
    near-term commitments to the financial guaranty industry and CIFG.

    Financial Guaranty Insurance Co.

    The ratings of FGIC and FGIC Corp. are placed on CreditWatch with negative implications. Our most recent
    analysis of the company’s non-prime RMBS and CDO of ABS exposure indicates a level of losses which would result
    in its capital position falling below our ‘AAA’ requirements. Application of current loss assumptions for 2005 to
    2007 vintage exposures indicates potential losses in excess of $2.0 billion. While the company has indicated that its
    goal is to create a capital cushion in excess of our requirements, there is execution risk associated with a number of
    components of the capital raising plan. Meaningful progress toward raising the needed capital could result in the
    removal of CreditWatch, however, placement of debt and financial strength ratings on negative outlook would be a
    most likely outcome.

    Financial Security Assurance

    The ‘AAA’ financial strength rating of FSA as well as the ‘AA’ senior debt rating and other related ratings of
    Financial Security Assurance Holdings Ltd. are affirmed. FSA has a long history of underwriting conservatism and
    compared to other companies in the industry, has less nonprime RMBS exposure. FSA only has $373 million of
    exposure to two CDOs of ABS, Subprime option ARMs and first lien Alt-A exposure since 2004 has been
    underwritten exclusively at the ‘AAA’ level. FSA has projected stress test losses of $216 million against a Dec. 31,
    2007 capital cushion of $700 to $750 million.

    MBIA Insurance Corporation

    The outlook on MBIA and MBIA Inc.’s financial strength and debt ratings is changed to negative and their ratings
    affirmed. The outlook change is warranted because of the absolute size of stress scenario losses relative to the
    adjusted capital cushion of $2.75 billion. The adjustments to MBIA’s Dec. 31, 2006 capital cushion were the
    retention of $500 million of special dividends, revision to the 2007 business plan, and the $1.0 billion capital
    infusion by Warburg Pincus. In the Dec. 31, 2006 capital adequacy model, it was assumed that the company would
    upstream $500 million in dividends in 2007 to support its share repurchase plan. These dividends were not
    upstreamed, therefore the capital cushion was adjusted to reflect this fact. The revision to the 2007 business plan
    included stronger premium pricing than predicted, improvement in the quality of the back book of business due to
    the retirement of some speculative credits in 2007, principally the EuroTunnel exposure. To address the strain on
    the companies’ claims paying resource due to the current conditions in the RMBS and CDO markets, the company
    has developed a capital plan that includes a capital markets debt instrument and reshaping of the insured portfolio
    through reinsurance transactions.

    XL Capital Assurance Inc./XL Financial Assurance Ltd.

    We revised the outlook on XLCA, XLFA, and Security Capital Assurance Ltd.’s financial strength and debt ratings
    to negative, while affirming the respective ratings. The outlook change is warranted because of the absolute size of
    stress scenario losses relative to the combined capital cushion of $645 million. There were no adjustments to XLCA/XLFA’s Dec. 31, 2006 combined capital cushion. To address the strain on the companies’ claims paying resources due to the current conditions in the RMBS and CDO markets, management has developed a capital plan
    that includes the following components:
    · The commutation/restructuring of several CDO transactions,
    · Reshaping of the insured portfolio through reinsurance transactions with third parties, and
    · Capital infusions from third parties.

    Radian Asset Assurance Inc.

    We affirm the ‘AA’ financial strength rating of Radian Asset. Radian has limited nonprime RMBS and CDO of ABS
    exposure. Nominal nonprime RMBS exposure is about $700 million and total CDO of ABS exposure is $800
    million. Following Standard & Poor’s negative outlook in January 2004, significant staffing and process upgrades in
    the areas of underwriting and risk management have occurred. Most of the company’s problematic credits date back
    to 2003. The company has not written any direct subprime RMBS since 2004. Stress losses are $68 million against a
    Dec. 31, 2007 capital cushion of $550 million to $600 million.

    ACA Financial Guaranty Corp.

    The financial strength and financial enhancement ratings on ACA are lowered to ‘CCC’ and placed on CreditWatch
    Developing. The lower rating reflects the substantial excess-of-modeled stress test losses of nearly $2.2 billion over
    the company’s adjusted capital cushion at Dec. 31, 2007 of approximately $650 million. While ACA has been
    diligently working to address contingent liquidity concerns, it has not focused significantly on raising additional
    capital. Lower new business activity during this period of rating uncertainty is a positive from a capital adequacy
    standpoint but the incremental improvement is not sufficient to close the gap between stress losses and the capital
    cushion. The magnitude of the gap is large enough to create significant doubt that the company could possibly
    access sufficient hard capital resources to resolve the problem. CreditWatch Developing acknowledges the possibility
    that the company may be able to modify its obligations to its counterparties but reflects the real possibility that the
    counterparties will require the company to post significant collateral going forward.

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