MBIA Cut to Deep Junk Status

MBIA's rating slashed to deep junk status, litigation worries continues

On Thursday, June 25, bond insurer MBIA's (MBI - Analyst Report) senior debt rating was lowered by Moody's Investors Service to Ba3 -- three levels below investment grade -- from Ba1. The downgrade cited expectations of further portfolio deterioration due to its exposure to risky mortgage-backed securities coupled with the uncertainties associated with the ongoing litigation over the company's restructuring that happened last February.

Moody's also changed the rating outlook of MBIA Insurance Corp. to negative. Additionally, Moody's affirmed the investment-grade Baa1 rating of National Public Finance Guarantee Corp., MBIA's dedicated municipal-bond insurance company.

Investors and world's 18 largest banks, including JPMorgan Chase & Co. (JPM - Analyst Report) and Bank of America Corp. (BAC - Analyst Report) have sued MBIA, claiming a fraudulent restructuring in February this year. They have alleged that MBIA's transfer of $5 billion in cash and securities from its main insurance unit to National Public Finance has left less money to pay off claims from souring mortgage securities.

Rival bond insurer Ambac Financial Group's (ABK - Analyst Report) ratings was also lowered by S&P on Wednesday, June 24, citing negligible prospects for writing new business. S&P lowered Ambac Assurance Corp three notches to BBB, while Ambac Financial's rating was also downgraded three notches to BB from BBB.

Companies such as ABK and MBIA have been hit hard by losses from mortgage-related securities.

Given the uncertainty associated with this litigation, new business writings at National Public Finance remain significantly constrained. We believe that the rating downgrades will dissipate MBIA's accessibility to various markets to build its capital levels.

The company is still losing money on risky mortgage-backed securities that it insured at the height of the U.S. housing bubble. Given the prolonged uncertainty for the group, we maintain our Sell rating on the shares of MBIA.