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Alessandro Della Bella/AP
Bond Insurers’ Ratings Tumble Leaves Banks on Edge
by
Anne Szustek
Ambac and MBIA’s downgrades from an AAA credit rating put UBS, Merrill Lynch and Citigroup on shakier footing, leaving them prone to more write-downs.
30-Second Summary
Standard & Poor’s lowered the two bond insurers’ credit rating to double-A status on June 5. Moody’s is expected to follow suit, and it may cut MBIA all the way down to single-A. Fitch had already downgraded MBIA and Ambac’s ratings two weeks earlier.
The news has sent major banks scrambling to gear up for another wave of write-downs. Citigroup, UBS and Merrill Lynch have all announced billions of dollars in write-downs since the start of the year.
A credit downgrade of bond insurers, who often back consumer investment bonds, means another deficit to be accounted for on banks’ balance sheets.
When a bond insurer’s credit rating drops, it is deemed a riskier investment—and its interest rate rises accordingly. The banks must then pay more in fees to their insurers, making the bond worth slightly less than par value.
An unnamed Wall Street executive said that Moody’s was to quick to downgrade MBIA and Ambac: “They and other credit rating agencies have been under pressure to anticipate development, rather than lag behind the curve.”
But CNBC’s Charlie Gasparino argued on a June 5 telecast that S&P was slow to downgrade MBIA and Ambac. He contended that when Fitch lowered the insurers’ credit ratings, “Ambac and MBIA needed a recapitalization; otherwise they would lose their AAA ratings. Their bonds were trading at junk bond levels.”
Bond insurers provide diversification for banks’ collateralized debt obligations, or CDOs, many of which have taken a hit during the sub-prime mortgage crisis. Gasparino suggested that it may behoove insurers to keep their CDO accounting books separate from those for municipal bonds.
The news has sent major banks scrambling to gear up for another wave of write-downs. Citigroup, UBS and Merrill Lynch have all announced billions of dollars in write-downs since the start of the year.
A credit downgrade of bond insurers, who often back consumer investment bonds, means another deficit to be accounted for on banks’ balance sheets.
When a bond insurer’s credit rating drops, it is deemed a riskier investment—and its interest rate rises accordingly. The banks must then pay more in fees to their insurers, making the bond worth slightly less than par value.
An unnamed Wall Street executive said that Moody’s was to quick to downgrade MBIA and Ambac: “They and other credit rating agencies have been under pressure to anticipate development, rather than lag behind the curve.”
But CNBC’s Charlie Gasparino argued on a June 5 telecast that S&P was slow to downgrade MBIA and Ambac. He contended that when Fitch lowered the insurers’ credit ratings, “Ambac and MBIA needed a recapitalization; otherwise they would lose their AAA ratings. Their bonds were trading at junk bond levels.”
Bond insurers provide diversification for banks’ collateralized debt obligations, or CDOs, many of which have taken a hit during the sub-prime mortgage crisis. Gasparino suggested that it may behoove insurers to keep their CDO accounting books separate from those for municipal bonds.
Headline Link: ‘Banks Face $10 Billion Monolines Charges’
Oppenheimer funds analyst Meredith Whitney reported this week that, with $6.3 billion, UBS had the largest exposure to monolines, which are write-downs related to bond insurers. Citigroup was next with $4.8 billion, and Merrill Lynch was at third with $3 billion.
Source: Financial Times (free registration may be required)
Video: ‘S&P Cuts MBIA, Ambac Ratings’
Eric Dinallo, the superintendent of the New York State Insurance Department, got in contact with officials at both bond insurers to discuss ways to bolster their standing. The department had already recently intervened to keep Ambac and MBIA’s AAA credit rating.
Source: CNBC
Background: Recent major write-downs
Merrill Lynch, Citigroup, UBS and Deutsche Bank have stunned the finance world with recent massive write-downs during the first two quarters of 2008. Jack Malvey, a research analyst at Lehman, tallied these global write-downs at $300 billion. The crisis ran so deep that JPMorgan Chase was widely hailed because its write-downs were “only” $2 billion.
Source: findingDulcinea
On April 17, Merrill Lynch announced more than $6.5 billion in write-downs and plans to cut at least 2,900 jobs, to the dismay of shareholders.
Source: findingDulcinea
An Oct. 17 Wall Street Journal blog post praised JPMorgan Chase for keeping write-downs to less than $2 billion.
Source: Deal Street blog on The Wall Street Journal
Reference: Write-downs and corporate bonds
When a company writes down assets, the result is one that affects only its financial statements; there is no outflow of cash. The company is merely adjusting the value of its assets on the balance sheet and disclosing that the value of certain assets has decreased.
Source: AllBusiness.com
Corporate bonds are generally a less volatile investment option than most, given their fixed rate of return. One risk that investors assume when buying corporate bonds is credit fluctuations of the issuing company. The lower a company’s credit rating, the higher the rate of return on the bond—as the investment is that much more risky.
Source: Investopedia
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