Research Roundup: Monoline Insurers
The continuing subprime-related writedowns by major financial institions have largely come as no great surprise, but Merrill’s Lynch’s announcement that it has written down to zero a $2 billion trade with monoline insurer ACA clearly spooked the markets.
Research Recap raised a red flag in December, highlighting an Alphaville report that S&P’s downgrade of ACA was going to have “a serious impact.”
Today Lex notes in the Financial Times that more trouble lies ahead for the monoline insurers, including MBIA and Ambac, both of which have already taken a major market beating, reflecting fears they may lose their AAA rating.
“Merrill acknowledged that by writing down, to the tune of 16%, the $4.1 billion of hedging gains from trades with triple-A monolines,” Lex writes. “That raises the prospect of a second leg of big charges for Merrill if the monoline situation worsens further.” Other banks will a also have to reflect the gathering over the bond insurers, when positions are next marked to market, according to Lex.
In a recent report on brokers, Wachovia Capital Markets quoted Bear Stearns as saying its monoline exposure is limited to positions in credit trading and to some extent its municipal inventory. “CFO Sam Molinaro mentioned that the ACA equity exposure to the firm is immaterial and that BSC has fully reserved for any ACA counterparty credit exposures.”
William Blair & Co last week reiterated its Market Perform rating on MBIA, noting that the company’s “exhaustive $2.5 billion Capital Management Plan should keep Rating Agencies quiet for now.” And Rapid Ratings raised its rating to a Speculative Buy, acknowledging that the company’s credit risk was High and the ratings 0utlook Negative.
Fox-Pitt Kelton remains bullish on the industry:”We believe that the remaining required capital will be achieved with a combination of reinsurance and issuance of securities (or soft capital facilities). ” In a Jan 8 report, the firm continued to rate MBIA as Outperform.
In the opinion of CreditSights, “the ability of Ambac to survive as a going concern is now in material jeopardy.”
“Barring a significant equity injection by an outside investor or the outright sale of the company to a highly rated buyer it is beginning to seem that a downgrade is inevitable.”
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