Here is the other extreme in perceived credit quality: Ambac, MBIA. Either a compelling buy opportunity even at a modest downgrade or a complete failure by rating agencies:
UPDATE 2-Ambac, MBIA default swaps trading as deep junk
Fri Nov 2, 2007 4:47pm EDT
(Adds analyst comment in sixth and seventh paragraph)
NEW YORK, Nov 2 (Reuters) - Credit derivative traders are valuing bond insurers Ambac Financial Group (ABK.N: Quote, Profile, Research) and MBIA Inc (MBI.N: Quote, Profile, Research) as deep junk credits, while their stock prices have also plunged on concerns the companies may need more capital to shore up their high ratings.
Credit default swaps on Ambac have surged to around 620 basis points, or $620,000 per year for five years to insure $10 million in debt, from 185 basis points a month ago, according to data provided by CMA DataVision.
Its shares have tumbled nearly 60 percent since the beginning of October, 41 percent this week alone.
Ambac and MBIA both reported third-quarter losses last week caused by their writing down the market value of their respective credit derivative portfolios, which are used to insure assets including residential mortgages against default.
Concerns are now weighing that to shore up the "AAA" ratings of their insurance arms, a key factor of their businesses, the companies will need to raise capital that investors may be unwilling to lend.
Morgan Stanley on Friday changed its recommendation on Ambac's stock to 'equal weight" from "overweight," and MBIA's stock to "equal weight" from "underweight."
"We now believe the guarantors, particularly Ambac, could be forced to raise equity as losses mount in order to protect its 'AAA' ratings," analyst Ken Zerbe said in a report.
Insurers guarantee about half of municipal bond sales each year and a loss of their "AAA" ratings would be a huge blow to the municipal bond market.
The cost to insure MBIA's debt with credit default swaps rose on Friday to 450 basis points, from around 131 basis points at the beginning of October, according to CMA data.
MBIA's shares are down 39 percent since Sept. 28, an unprecedented swoon, including a 27 percent drop this week alone.
At Thursday's close, Ambac's swaps implied a rating of "Caa1," seven levels below investment grade and 14 notches below its actual rating.
Ambac's bonds are faring better, trading at levels that imply a "Ba2" rating, two levels below investment grade, according to Moody's data.
MBIA Inc's default swap spreads, meanwhile, are trading as though they carry a rating of "B2," five levels below investment grade, and 12 notches below the company's "Aa2" rating, according to Moody's data.
Swaps on Ambac and MBIA's "Aaa"-rated insurance arms Ambac Assurance Corp and MBIA Insurance Corp are trading as though rated "B2," five levels below investment grade, and "B1," four levels below investment grade, respectively, according to Moody's data.
RATING CONCERNS
Concerns about the insurer's ratings have persisted in spite of a statement on Wednesday by Standard & Poor's that the mark-to-market losses will not impact on their ratings. For more see [ID:nN31321929].
"Because the overwhelming majority of the credit default swaps have "AAA"-quality underlying risks at origination, a very high percentage of the swaps will likely mature without any claims on the bond insurer," S&P analyst Dick Smith said in a report.
"Therefore, for these performing transactions, the negative (or positive) marks to market will zero out at the maturity of the contracts," he said.
However, some analysts continue to have doubts.
"We think it likely there will be additional downward ratings migration among some CDO tranches," Gimme Credit analyst Kathleen Shanley said in a recent report.
"And we fear further erosion of investor confidence will begin to threaten franchise value at both firms, if clients begin to seriously question whether a guarantor's wrap is worth the additional cost," she said. (Additional reporting by Dan Burns and Anastasija Johnson)
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