Wednesday, December 12, 2007 0 comments ++[ CLICK TO COMMENT ]++

Bond Insurance News: Security Capital'a AAA Rating Threatened

Fitch indicated today that Security Capital (SCA) doesn't have enough capital for its AAA rating. It is short by $2 billion, which is very large for its present market cap of around $400 million.

The company's capital is at least $2 billion below what it needs to retain the AAA following downgrades of collateralized debt obligations the insurer backs, Fitch said. SCA has four to six weeks to come up with ``firm capital commitments'' to meet the guidelines, or the rating will fall two levels to AA, Fitch said.

I suspect it is going to be awefully difficult for SCA to raise $2 billion. Bill Ackman thinks this will be the first bond insurer to go bankrupt.

The rating agencies will provide their guidance for Ambac and others soon. Although SCA is one of the weaker AAA insurers, the potential rating downgrade shows how severe the deterioration in the ABS and CDO market has been in just a few months. If you look at my prior post where I showed the chart of capital under various stress tests, you can try to estimate potential loss for Ambac. Fitch marked SCA as having 1.05x required capital under a normal scenario, and 1.04x under their previous stress scenario. Ambac was shown to have 1.11x under a normal scenario and 1.05x under the stress scenario. It's truly amazing to see SCA lose so much and there is a potential for Ambac to get hit badly as well. The rating agencies have details of the securities that were insured, and they are doing a thorough analysis (their reputation depends on it) so extrapolating from that original chart is very rough. Nevertheless it provides some guide.

There are 7 AAA-rated monolines right now and I am guessing we may just end up with 3 when all is said and done. I think MBIA will one of them... not sure which other...


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