Following MBIA Inc.’s
announcement to settle down $3.0 billion of its commercial mortgage backed securities (CMBS), the rating agency – Moody's Investors Service, the credit rating business of Moody's Corporation
(MCO - Analyst Report
) jumped into action and placed the ratings of the parent company and its subsidiaries on review for upward revision.
The ratings put under review include 'B3' insurance financial strength (IFS) rating of the subsidiaries MBIA Insurance Corporation (MBIA Corp.) and MBIA Mexico S.A de C.V; 'B1' IFS of MBIA UK and 'Ba3' rating of senior debt of the parent company, MBIA Inc. Additionally, the 'Baa1' IFS rating of National Public Finance Guarantee Corporation (National) was affirmed with a positive outlook.
The rating agency views that the commutation of $3.0 billion of the company’s exposure to the toxic CMBS will improve the credit profile of MBIA Corp. and at the same time, strengthen its capital position.
MBIA Corp.’s primary strategy for managing its CMBS pool and asset-backed securities collateralised cebt obligations (CDOs)(ABS CDO)exposures has been commutations. MBIA Corp. continues to seek to reduce both the absolute amount and the volatility of its obligations and potential future claim payments through the execution of commutations of insurance policies. During the nine months ended Sep 30, 2013, MBIA Corp. commuted $19.9 billion of gross insured exposure, primarily comprising structured CMBS pools, investment grade CDOs, ABS CDOs, first-lien subprime RMBS, high yield corporate CDOs, commercial real estate collateralised cebt obligations (CRE CDOs), structured insurance securities, and first-lien alternative A-paper (“Alt-A”) Residential Mortgage backed securities (RMBS).
After settling down $3.0 billion of its CMBS, the company will be left with only $760.0 million of exposure to CMBS, which is backed by $391.0 million of loss reserves. The securities underlying these CMBS are rated Baa.
Moody’s rating action on MBIA U.K. reflects its strong capital position. The company has enough financial resources relative to its insured exposure. Also, MBIA UK has limited relation with MBIA Corp. such that a capital strain on MBIA Corp. will not materially affect MBIA UK.
As for the parent company, the rating action reflects its subsidiaries’ improvement of their credit profiles and restarting of dividend payments from National.
With regard to National, its IFS rating affirmation comes on the back of its strong capital position and continuous efforts made by the company to de-risk its insured liabilities. However, the rating agency is concerned that National has not written any meaningful amount of business since its formation in 2009 and that the company will continue to struggle from soft economic conditions and not-so-strong fundamentals in the mortgage industry.
Going forward, Moody’s may upgrade the ratings of MBIA Corp., MBIA UK, MBIA Mexico and MBIA Inc. if these entities manage to maintain a strong capital position settling their liabilities.
National can expect a rating upgrade if it manages to write enhanced new business while maintaining high underwriting standards. Also, an improvement in MBIA Corp. will indirectly benefit National in that it will extinguish the reliance of the former on the latter for capital contribution.
Strong credit ratings by leading rating agencies are essential for private mortgage insurers to compete in the industry. Moody’s action to bring ratings under review for potential upgrade bodes well for MBIA Inc. given that it has suffered huge losses from the subprime crisis. Other private mortgage insurers which have suffered equally are Radian Inc.
(RDN - Analyst Report
) and MGIC Investment Corp
. (MTG - Analyst Report