Monoline Bond Insurers Next for Bailout?
The financial markets have a vested interest in preventing the monoline bond insurance industry from imploding, because widespread downgrades in the sector would have a far-reaching impact, according to CreditSights.
Now that the markets have pilloried the sector for the better half of the year, the rating agencies are once again in reactive rather than proactive mode, CreditSights says in a new report. Both FGIC and SCA (XL Capital Assurance) are on review for a possible downgrade by Moody’s and MBIA and CIFG were hit with negative outlooks.
While the market has deteriorated at a rate far faster and wider than we and most other investors had expected, it has been clear for some time now that industry as a whole simply does not hold sufficient capital to absorb a fat tail structured default event.
CreditSights notes:
- The loss of the AAA monoline business model could potentially force banks to consider taking write-downs on the value of their monoline wraps.
- A sustained lack of credible monoline wraps for structured finance deals could keep structured finance new issuance at a minimum for several more months, further jeopardizing the economic sectors such as housing and commercial real estate that grew so dependent on structured finance in recent years.
- Monoline downgrades could also create more turmoil in the municipal bond market, a market which is critical to fixed investment in the US and which is highly dependent on monoline wraps.
Given the extent of the financial system’s exposure to the monoline sector, it is easy to see that a large number of stakeholders have a large vested interest in preserving the monoline AAA model, CreditSights says.
Does this mean that there could be some form of superfund bailout for the industry? At this point, chatter of this possibility has been limited but it does seem to us that the markets have a vested interest in preventing the industry from imploding.
MBIA has already received a $1 billion infusion from Warburg Pincus and Ambac also has announced capital-raising plans. The Financial Times reports that private equity firms see the need for bond insurers and other financial firms to shore up their balance sheets as an attractive investment opportunity.
The CreditSights report Monoline Monitor: Thinking the Unthinkable, includes Status Updates for each of the monoline insurers and is available for purchase.
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December 21st, 2007 at 12:37 pm
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