Assured Guaranty Gets Ratings Chop

Fitch Ratings cut the ratings of monoline Assured Guaranty, in another blow to the insurer’s ability to do business. Assured is likely to continue to face rating struggles, a particular challenge, since under the terms of monoline operations, an insurer can not insure anything that carries a superior rating. This means that Assured Guaranty, cut from triple-A to double-A will not face the opportunity to insure prime bonds, even in the municipal space, the traditional playground of monoline activity before the firms moved into mortgage-related bond assurance. Fitch says its decision is based on the fact that Assured Guaranty continues to face negative credit migration within its combined insured portfolio, though primarily related to structured finance. The deteriorating performance is outpacing the company’s ability to build capital resources through earnings retention, according to Fitch Ratings. The firm lost its Moody’s Investors Service triple-A rating last November. As with Moody’s, Assured objects to the reasons behind the downgrades, arguing that it’s exposures to housing deals inked during the boom, is limited. Further, after falling under considerable scrutiny themselves, ratings agencies are constantly tightening criteria, in ways that don’t always please clients and investors alike. [“Fitch’s] decision reflects their new and more pessimistic assumptions about the economy and the future credit performance of our structured finance portfolio, in particular for US residential mortgage-backed securities (“RMBS”) and trust preferred securities collateralized debt obligations (“TruPs”),” says Dominic Frederico, CEO of Assured Guaranty. “Both of these assumptions are subject to considerable uncertainty that will dissipate within the next several months as the economy begins to benefit from the federal government’s economic stimulus plans and mortgage assistance programs. Fitch’s action today results from the higher loss assumptions projected by their model because of these pessimistic assumptions, thereby changing their evaluation of Assured’s capital position relative to their rating criteria.” Fitch’s ratings on Assured Guaranty $200m of 7.0% senior notes due 2034 are now single-A, down from single-A plus. Ratings on Assured’s $150m series A enhanced junior subordinated debentures are now rated single-A negative, down from A. With close to $18.4bn of net par in force as of Dec. 31, 2008, mortgage-related exposures are a particular area of concern and potentially represent a material source of credit risk. Additionally, exposures to $7.3bn of trust preferred securities collateralized debt obligations, is considered by the credit rating agency as an “adverse credit development,” which creates pressure upon the company’s capital position vis-a-vis its current ratings level.