Clock ticking for troubled monolines
Monoline insurers are finding it difficult to raise capital in the face of the continuing decline in credit quality. New-York based insurers Ambac and FGIC, and SCA, headquartered in Bermuda, saw doubt cast on their ability to raise enough capital to avert downgrades.
Simultaneously, Ambac announced plans for a $1 billion capital injection through the sale of equity and equity-linked notes, and slashed its dividends by 67%. However, this was not enough to prevent Moody’s Investors Service placing Ambac on review for downgrade – a measure already taken by Fitch Ratings and Standard & Poor’s.
Ambac’s stock price plummeted 39% on Wednesday, while five-year credit default swaps for the insurer widened 85 basis points to 533bp.
A research report by London-based Royal Bank of Scotland analyst Michael Cox cast doubt on Ambac’s ability to raise the required capital.
“We now see significant execution risk with its capital plan,” wrote Cox. “The market has deteriorated since MBIA sold its surplus notes, with those notes seeing considerable weakness in the secondary market. New credit losses at Ambac will hurt investor confidence in the insured portfolio.”
MBIA last week completed a 25-year subordinated offering, with an option to call the notes after five years. The move was enough for Fitch to affirm MBIA’s triple-A ratings yesterday with a stable outlook. However, deteriorating investor confidence in the monolines has seen spreads for the notes widen from a 14% launch coupon to 17% in secondary trading.
With the exception of FSA and Assured Guaranty, which have only limited exposure to US subprime mortgage debt, the immediate outlook for monolines looks set to worsen. Decreases in US house prices are expected to be larger than previously thought, prompting S&P to further review monoline exposures to the subprime sector. S&P will now assume losses on 2006 portfolios of 19% rather than 14%, increasing significantly the prospect of downgrades. Results from the review are expected next week.
Downgrades already seem unavoidable for two other monolines, FGIC and SCA, both on ratings watch negative by all three agencies. To avert downgrades, FGIC needs to raise $1 billion – 39% of its statutory capital – while SCA’s position is even more precarious. SCA’s capital shortfall is $2 billion, greater than its $1.7 billion statutory capital base.
“Their new capital requirements are greater than those of MBIA and Ambac relative to their size and we simply cannot see where they can raise the capital from,” said Cox.
See also:
S&P puts pressure on monolines
Monolines in a world of pain
Ratings figure
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Markets
Credit determinations review proposes independent members
Isda AGM: Linklaters unveils key recommendations for CDS committee overhaul
Saudi Arabia poised to become clean netting jurisdiction
Isda AGM: Netting regulation awaiting final approvals from regulators
Buy side looks to fill talent gap in yen rates trading
Isda AGM: Japan rate rises spark demand for traders; dealers say inexperience could trigger volatility
JP Morgan’s new way to trade FX overlays
Hybrid execution method allows clients to put dealers in competition via a single trading agreement
Pension funds eye 30-year Bunds as swap spread tightens
Long-dated bonds continue to cheapen versus euro swaps, and some think they might fall further
Banks mull whether to stick or twist with SDPs
Fewer providers are going all-in on single-dealer platforms, which may lead to consolidation
Market for ‘orphan’ hedges leaves some borrowers stranded
Companies with private credit loans face punitive costs from banks for often imperfect hedges
Green knights? Banks step into struggling carbon credit markets
Clearer global standards and a new exchange may attract dealer entry, but supply and demand challenges remain
Most read
- Top 10 operational risks for 2024
- Japanese megabanks shun internal models as FRTB bites
- LCH issued highest cash call in more than five years