MBIA, Ambac Credit Ratings Under Threat at Moody's

Moody's Investors Service placed the Aaa insurance ratings of MBIA Inc. and Ambac Financial Corp. under review for a downgrade for the second time this year after the two largest bond insurers reported wider losses from the mortgage-market slump.

MBIA shares tumbled to the lowest since June 1988, Ambac slumped to a new all-time low and credit-default swaps on their debt rose after Moody's analyst Jack Dorer said a rating cut is ``the most likely outcome'' of the reviews. Dorer cited diminished ``new business prospects and financial flexibility'' and the likelihood for bigger insurance losses.

MBIA Chief Executive Officer Jay Brown rebuked Moody's and said the review is ``unnecessary.'' Ambac CEO Michael Callen said the timing was ``unfortunate'' because the company's problems are temporary. Armonk, New York-based MBIA and Ambac of New York sold a combined $4.1 billion in shares, bonds and convertible debt to bolster capital and save their ratings. With the shares down more than 90 percent in the past year and their debt under review, raising more money may not be possible, analysts said.

``These companies are getting hit from all sides,'' said Robert Haines, an analyst with CreditSights Inc., a bond research firm in New York. They ``aren't writing new business, they're going to have more losses and they can't access the market to replenish capital. How can they be triple-A rated?''

MBIA Insurance Corp.'s insurance financial strength rating likely will fall to the Aa range, and a drop to the A category is possible, Moody's said today in a statement. Ambac Assurance Corp.'s ranking will probably be lowered to Aa, Moody's said in a separate statement.

Shares Drop

MBIA, which had plunged 90 percent in the past year, dropped $1.06, or 16 percent, to $5.63 today in New York Stock Exchange composite trading. Ambac, down 97 percent in the past year, fell 51 cents, or 17 percent, to $2.49.

Credit-default swaps tied to MBIA's insurance unit rose to a record as investors hedged against the risk the company's guarantees will sour. Sellers of five-year contracts demanded 23.5 percent upfront and 5 percent a year, according to CMA Datavision. That's up from 18.5 percent initially and 5 percent a year yesterday.

The upfront cost to protect Ambac guarantees jumped to 25.5 percent from 21.5 percent, CMA prices show.

The contracts pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements or if it can't make good on its guarantees.

No Changes

Moody's and Standard & Poor's put the ratings of Ambac and MBIA under review for the first time in January. The prospect of downgrades earlier this year roiled world capital markets on concern that guarantees for more than $1 trillion of debt may be worthless. Moody's affirmed the Aaa ratings on the insurance units of MBIA in February and Ambac in March.

Fitch Ratings cut Ambac to AA in January and MBIA to AA in April.

``We disagree with Moody's decision,'' MBIA's Brown, said in a statement today. Moody's had given MBIA the impression in February that it had 6 to 12 months before the ratings may come under scrutiny. ``Since then, there have been no material adverse changes in the environment, and we believe our capital position has improved,'' Brown said. ``Thus we are surprised by both the timing and direction of this action and can only conclude that the requirements for a Triple-A rating continue to change.''

Moody's flip-flop on its rating has driven down new business ``precipitously'' in the past month, he said.

`Meaningful Uncertainty'

Ambac's Callen said the uncertainty surrounding the company is temporary. ``Outside the mortgage-related exposures, the remainder of our portfolio is performing well, and in line with our expectations,'' Callen said in a statement. The company has no plans to raise capital, he said.

Ambac reported a $1.66 billion net loss in the first quarter after $3.1 billion in charges for subprime-mortgage securities that it insured. MBIA had a loss of $2.4 billion as the value of derivatives it sells to guarantee debt tumbled $3.58 billion.

Dorer cited ``meaningful uncertainty'' surrounding Ambac's ability to regain market share since the first reviews. Callen yesterday said Ambac is writing minimal new business because potential customers lack confidence in the company's top ratings.

MBIA's results have shown ``continued deterioration within the guarantor's insured portfolio,'' Dorer said.