By Christine Richard
April 4 (Bloomberg) -- Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.
MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said.
Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year.
``It will be difficult for MBIA to stabilize its credit trend until the company can more effectively limit the downside risk'' from collateralized debt obligations, Fitch said.
The long-term rating of MBIA Inc. was cut to A from AA, Fitch said.
``We respectfully disagree with Fitch's conclusions,'' MBIA Chief Financial Officer Chuck Chaplin said today in a statement. ``MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio.''
MBIA shares closed down 68 cents, or 4.8 percent, to $13.61 in New York Stock Exchange Composite trading. The stock has declined 27 percent this year.
MBIA raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months.
Those decisions prompted Moody's and S&P to keep their top ratings for MBIA. Fitch continued its review. Fitch has rated MBIA's insurance unit since at least 2000, according to data compiled by Bloomberg. S&P and Moody's have rated the company since at least 1987, the data show.
MBIA last month asked Fitch to stop rating the company because it disagreed with the ratings company's requirement that MBIA hold more capital.
MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers stumbled after expanding into CDOs that caused losses of more than $7 billion. CDOs repackage pools of assets into securities with varying degrees of risk. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities.
``It's tough for a rating agency to downgrade a bond insurer, to take away the AAA rating,'' said Mark Adelson, founding member of Adelson & Jacob Consulting in Long Island City, New York.
The capital MBIA raised has yet to be contributed to its insurance company and could be diverted to meet obligations at the holding company, Fitch said in its report. MBIA's holding company engages in transactions that may require it to post collateral, creating a rising demand for cash, Fitch said.
MBIA's suspension of its structured finance business, which includes CDOs and asset-backed securities, may help to boost the company's rating back to AAA in the future, Fitch said today.
MBIA will have losses on CDOs backed by subprime mortgages of as much as $4.9 billion after taking into account that they will be paid over time, Fitch said.
The analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those originated in 2007 will lose 26 percent, Fitch said. Subprime mortgages are given to borrowers with poor credit.