Moody's Q&A on Bond Insurers

Moody’s has issued a new Q&A outlining its views on the prospects for bond insurers. Moody’s said it has received many investor calls about recent rating activity in the financial guaranty industry.

For example:

Q. Do recent rating actions indicate that Moody’s believes that Aaa ratings are no longer sustainable in this industry?

A: Moody’s decision to place the ratings of FSA and Assured Guaranty (NYSE: AGO) on review for downgrade reflects company-specific credit issues and is not in itself a statement about the sustainability of triple-A ratings in the industry. These reviews were prompted by a substantial shift in demand for financial guaranty insurance, in addition to the presence of large, complex and concentrated risks within the portfolios of both firms in an environment where business opportunities have been exposed as being extremely sensitive to market confidence. FSA’s review also reflects material credit stress within its insurance and financial products operations.

Other topics addressed include:

• Why is Moody’s considering downgrades of Assured and FSA when they have sufficient resources to meet your Aaa threshold? Has your methodology changed?
• If a decline in industry fundamentals is an important factor leading to the rating actions on FSA and Assured, why was Berkshire Hathaway Assurance (NYSE: BRK.A) not similarly affected?
• How does Moody’s view the recently announced agreement between SCA (NYSE: SCA) and Merrill Lynch (NYSE: MER) regarding credit default swaps on troubled ABS CDO exposures? What are the implications for other guarantors?

Moody’s believes that most guarantors are involved in discussions with bank counterparties for the commutations of credit default swaps on ABS CDOs, although in many cases, there remain significant obstacles to reaching agreements – primarily related to settlement amounts.

• How sensitive are the various financial guarantors to future deterioration in mortgage performance?

• To the extent that the ratings for firms within the industry migrate lower into the Aa range, how do you see that affecting the overall business?

Details are available in Moody’s Financial Guaranty Update: Frequently Asked Questions.