Monolines surge as top ratings secured

US share prices staged a late rally on Monday after Standard & Poor’s affirmed the top-notch credit ratings of beleaguered bond insurers MBIA and Ambac and said MBIA was no longer at risk of a downgrade.
However, S&P indicated that it could still downgrade Ambac, depending on the outcome of behind-the-scenes talks now being conducted between banks and rating agencies on a $3bn rescue plan for the bond insurer.
US stocks, which had been modestly higher on the day, rallied later on the S&P announcement, with the S&P 500 index closing up 1.4 per cent. MBIA shares gained 19.7 per cent. Ambac rose 15.9 per cent.

In a letter to shareholders MBIA, the biggest monoline, on Monday outlined its plans, saying it would stop writing new structured finance business for about six months and eliminate the quarterly dividend. It confirmed it would restructure the company to separate the municipal guarantee business from the structured finance business within five years. MBIA has raised $2.6bn in extra capital.

A group of eight banks, led by Citigroup and UBS, is preparing to inject up to $3bn into Ambac, the second-largest bond insurer. The money would be part of a plan to split Ambac’s operations into a triple-A rated municipal bond business and a structured finance business with slightly lower ratings.

A downgrade of Ambac would potentially lead to downgrades on $550bn of bonds that it guarantees. Banks could be affected because a downgrade could reduce the value of Ambac guarantees on collateralised debt obligations and derivatives trades, such as credit default swaps.

MBIA, the largest bond insurer, has raised $2.6bn in additional capital, more than Ambac has attracted so far. MBIA is also discussing ways to restructure its business to ensure its ratings are not cut by Moody’s, which still has the bond insurer on watch for downgrade.

Rating agencies Moody’s and S&P have both come under pressure to assign new credit ratings to the proposed structure for Ambac before a deal to recapitalise the group is completed. The announcement of a deal to recapitalise Ambac could be delayed for up to another week by issue of whether new ratings will be issued.

“It is highly unusual for ratings agencies to be part of a transaction and there are numerous procedural issues that have to be worked through as they usually do not assign ratings until something is completed,” said a person involved in the deal.

Stefan Jentzsch, head of investment banking at Allianz’s Dresdner Bank, said it planned to support a rescue package “if what is now on the table comes to pass”. He said Dresdner was ready to put up a sum in the low tens of millions of euros.

The potential deal comes just a month after Eric Dinallo, New York’s insurance superintendent, called a meeting with top Wall Street firms urging them to consider a way to inject capital into bond insurers.

Banks have had to calculate whether costs of putting funds into Ambac would be less than the costs of writedowns associated with downgrades. Bond insurers are facing a surge in claims after guarantees on mortgage-related bonds have proved to be riskier than anticipated.