Thursday, December 20, 2007

Fears mount over bond insurers

Published: December 20 2007 17:42 | Last updated: December 20 2007 17:42
The Financial Times

The crisis of confidence around bond insurers deepened on Thursday after MBIA revealed larger-than-anticipated exposure to risky complex bonds linked to faulty mortgages.

Shares in MBIA, which guarantees payments on nearly $700bn of debt, were nearly 23 per cent lower in midmorning trade at $20.84 after the details came to light. MBIA revealed the figures by linking to a table late on Wednesday in statement about its credit ratings.

EDITOR’S CHOICE
MBIA is the largest of the so-called monoline insurers, companies which use their top triple-A credit ratings to guarantee bonds issued by municipalities such as cities and towns. In recent years, these insurers have branched out to insure structured or securitised debt, including bonds backed by mortgages and other assets called collateralised debt obligations, or CDOs.

MBIA said its total exposure to bonds backed by mortgages and collateralised debt obligations is about $30.61bn. This includes exposure of about $8.14bn to CDOs backed by a combination of other CDOs and mortgages, called “CDO-squared”, which are regarded as potentially riskier.

These types of bonds have a much higher rate of default than municipal bonds, which are backed by predictable income streams such as payments of utility bills or tax income.

Indeed, the rate of default for structured bonds has risen further owing to their exposure to sub-prime mortgages, where lending has soared to such an extent that the risks taken have increased too and the number of people failing to repay loans has risen hugely.

“We are shocked that management withheld this information for as long as it did,” said Ken Zerbe, analyst at Morgan Stanley, in a note. “We continue to recommend investors avoid the financial guarantors until we can get better visibility into the ultimate losses they will take...as well as their ultimate capital raising plans.”

The uncertainty around the creditworthiness of monoline insurers is one of the factors weighing on the credit markets and making it difficult or expensive for banks, companies and countries to borrow.

Rating agencies this week said the triple-A credit ratings MBIA, Ambac and other bond insurers would be retained but warned of the uncertainties facing the companies. S&P said both MBIA and Ambac faced a negative outlook due to the difficulties of the insurers to assess capital needs amid uncertainty about the state of the mortgage market.

S&P said it had factored in the exposure revealed by MBIA into its ratings analysis. Moody’s, which also asigned a negative outlook to MBIA’s triple-A ratings, also said it had factored in exposure revealed by MBIA.

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