Research Roundup: Monoline Update
The likelihood of credit ratings downgrades of the major monoline bond insurers continues to increase as writedowns mount and sources of capital dry up.
“As the rating agencies have continued to move the AAA capital requirements higher and higher, the markets have taken a more bearish stance towards the sector which, in turn, has effectively cut the sector off from the debt and equity markets where they were planning to raise much of that capital, ” CreditSights notes in Monoline Monitor: Crossing the Credit Rubicon.
As it stands now, barring a regulatory sponsored bank funded bailout, the sector is facing the near-term prospect of multiple downgrades.
In CreditSights’ opinion, “the bailout option being pushed by NY State Insurance Superintendent Dinallo is simply coming too late to the game…we continue to believe the monoline problem will ultimately require a broader multi-faceted regulatory response.”
Adding more fuel to the fire, Pershing Square Capital’s Bill Ackman now estimates potential losses by MBIA at $12.6 billion and Ambac at $11.6 billion. A longtime critic and short-seller, Ackman is backing his claim that the companies could soon be insolvent with a massive “OpenSource” model comprised of hundreds of spreadsheets detailing the monolines’ holdings at risk. Ackman has sent the model to regulators and others, accompanied by a letter.
The Open Source Model estimates that probable losses on the entire universe of 534 ABS CDOs issued between 2005-2007 will be approximately $231 billion, with super senior tranches accounting for approximately $92 billion of this total.
Ackman’s letter and model is available here.
Overnight MBIA posted its biggest-ever quarterly loss of $2.3 billion, and may raise more capital to offset a slump in the value of subprime-mortgage securities, Bloomberg reports in a comprehensive rundown of recent developments.
Oxford Analytica concurs that bond insurers are likely to face more ratings reviews and downgrades as efforts to raise capital fall short. “While bailout efforts are welcome, regulators have few levers to encourage participation by banks. Even if recapitalisation succeeds, monolines have seen a huge drop in confidence from investors — which will take time to restore and could imply serious problems for the future monoline business model. ”
Given the size of banks’ total insured bond portfolios, analysts have estimated downgrades could result in 200 billion dollars in total bond losses and bank writedowns, OxAn says in Monoline downgrades put system at risk.
Much of this exposure may be concentrated: Citigroup, UBS, and Merrill Lynch’s losses could total 70 billion dollars if bond insurers lost their top credit rating, according to Oppenheimer & Co.
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