US bond insurers will face downgrades -Egan Jones
Tue Nov 6, 2007 3:37pm EST
NEW YORK, Nov 6 (Reuters) - Bond insurers will become more challenged for capital over the next several quarters as they write down the value of mortgage-linked securities, and this will eventually lead to ratings downgrades, independent research firm Egan Jones Ratings Co said on Tuesday.
"The refrain that there is little risk because a security has a high rating is no longer valid," Sean Egan, co-founder of the firm, said on a conference call.
"Additionally, the view that some bonds are trading at depressed levels because of illiquidity is rapidly being debunked -- the reason a number of securities are trading at weak levels is because losses are already 'baked in' and will manifest themselves within the next couple of years," he said.
Bond insurers including MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Corp (ABK.N: Quote, Profile, Research) have seen their stocks plunge and debt protection costs rise on concerns they will not be able to raise the capital required to keep the "AAA" ratings of their insurance arms.
As bond insurers write down losses from mortgage holdings they will need to raise capital, or face downgrades, Egan said.
"We don't think they are going to be able to raise the capital that they need to, so we think some of them will be faced with major downgrades," he said. "The issue is whether they will be able to continue to exist with those downgrades; time will tell, it depends on the particular firm."
Without a white knight or other investment some insurers may not have access to the capital they will require to survive, Egan said. Also, "the barriers to entry in the monoline insurance business are relatively low and thus, as the debacle unfolds, new insurance firms will arise to fill future market needs."
An indication of the financial flexibility of a company can be seen by looking at projected losses from its loan holdings, and dividing these by the company's market capitalization, Egan said.
Egan views ACA Capital (ACA.N: Quote, Profile, Research) as the least flexible insurer based on this calculation. |
