New “Exposure Assessments” Show More Rating Risks

Fitch Ratings has announced the process it will employ in updating its analysis of the structured finance collateralized debt obligations (SF-CDOs) insured by the financial guaranty industry, as well as the potential implications for their ‘AAA’ Insurer Financial Strength ratings.  This will only move to shed more light on the point that the worst cannot be entirely behind us nor that the end is even close. The full link to the press release is here.  If you think this is a sign of the times that many more high-grade ratings aren’t going to be revised downward, then you might find yourself alone.

Fitch notes that should a financial guarantor add to its capital, or enact an effective risk mitigation strategy prior to the completion of its capital analysis, Fitch would consider the impact of such activities in formulating the conclusions from its capital analysis. Fitch expects to complete its capital analysis within the next four-to-six weeks.

The following are preliminary observations on the positioning of the ‘AAA’ rated financial guarantors, and the relative probability that each may experience erosion of their capital cushions under Fitch’s updated stress analysis. These observations are based on Fitch’s Sept. 6 study, preliminary review of each guarantor’s performance on Matrix as of June 30, 2007 and, where available, Sept. 30, 2007, and analysis to date of the risk profile of each guarantor’s SF CDO portfolios:

• High Probability: CIFG Guaranty (CIFG) and Financial Guaranty Insurance Company (FGIC) appear most likely to experience contraction in their capital cushions under Fitch’s analysis, barring additional capital raising or risk mitigation efforts. This reflects the materiality of SF CDO exposures relative to the most recently measured capital cushion. Fitch notes FGIC appears to be the better positioned of the two due to more recent improvements to its existing capital cushion;
• Moderate Probability: Ambac Assurance Corp. (Ambac) and Security Capital Assurance (SCA) may also experience pressure in their capital cushions due to relatively high SF CDO exposures relative to the most recently measured capital cushion. However, the degree of cushion relative to exposures is better than for the companies noted above. Fitch’s assessment of SCA includes the impact of certain recent risk mitigation initiatives;
• Low Probability: MBIA Insurance Corp. (MBIA) appears to be materially better positioned than the four previously noted guarantors due a lower level of higher-risk SF CDOs relative to the most recently measured capital cushion. Fitch notes MBIA underwrote SF CDOs in third quarter 2007, and will consider these recently added exposures in its analysis;
• Minimal Probability: Due to minimal SF CDO exposures and strong initial capital cushions, Fitch anticipates no capital or rating issues resulting from its updated capital reviews of Assured Guaranty Ltd. (Assured) and Financial Security Assurance Inc. (FSA).

There has to be a reason that this looks and feels a lot like the old Resolution Trust Corp. situation after the massive personal and business implosions from the 1980’s.

to be continued……………….

Jon C. Ogg
November 5, 2007