2nd UPDATE: S&P Affirms AAA Ratings For MBIA, Ambac

Last Update: 2/25/2008 5:06:16 PM

(Updates throughout with detail from S&P report, comment from S&P analyst,
context and share prices.)

By Lavonne Kuykendall
Of DOW JONES NEWSWIRES

In an apparent vote of confidence for the business strategies of the two largest
bond insurers, Standard & Poor’s on Monday reaffirmed the AAA credit ratings of
MBIA Inc. (MBI) and Ambac Financial Group (ABK).

The news sent share prices for the bond insurers sharply higher, giving the
broader U.S. equities market a big lift in afternoon trading. Shares of MBIA
gained 20% to finish at $14.58 and are up to $14.67 in after-hours trading. Ambac
shares rose 16% to close at $12.41 but are down to $12.39 in late trading. The
benchmark investment-grade derivatives index, which measures the cost of insuring
U.S. investment grade corporate debt against default, also rallied after the
ratings announcement.

Market participants have been eagerly awaiting news from rating agencies, which
have threatened to downgrade MBIA and Ambac amid a decline in the value of
complex mortgage-backed securities on which the companies provide guarantees.
Bond insurers have been scrambling to raise capital to maintain the top-tier
ratings, with some considering broader restructurings.

The affirmations suggest that steps taken so far by MBIA and Ambac will be enough
to ensure that, at least for now, they have sufficient capital to cover expected
losses on their exposure to subprime mortgages. That could help alleviate
concerns about the possibility of downgrades that would have damaging effects for
financial institutions that are forced to write-down the value of securities
guaranteed by the bond insurers.

S&P removed MBIA from CreditWatch with negative implications, assigning instead a
negative outlook. That implies less chance of an imminent downgrade, though S&Psaid risk remains for MBIA owing to the absolute size of possible losses and
uncertainty surrounding the possible reconfiguration of the company.

In the case of Ambac, S&P maintained the company on CreditWatch because of
“uncertainty surrounding the risk profile and capitalization plans for the
reported new capital structure being contemplated by the holding company.”

Ambac has been in the spotlight following reports last week that it was preparing
a capital-raising plan as a prelude to a possible move to separate the municipal
bond insurance operations from the more-troubled, loss-prone structured financed
side. Speculation surrounding Ambac intensified since late Friday following
reports that the company was nearing agreement with banks on a plan to inject
about $3 billion.

S&P said Monday in a report that success in the capital-raising plans that have
been reported “would more than cover the approximate $400 million shortfall of
capital cushion versus projected losses.” S&P also noted that the current
shortfall “is a relatively modest number relative to the size of the company’s
capital position,” noting that Ambac could pursue other actions, including
reinsurance transactions, to at least partially eliminate the shortfall.

As for MBIA, S&P said the company’s capital raising success - the company raised
about $3 billion through a share offering, a debt offering and a big dividend cut
- is “a strong statement of management’s ability to address the concerns relating
to the concerns relating to the capital adequacy of the company.” S&P added that
it is also “a strong statement by investors of their understanding of MBIA’s
franchise value and business practices.”

S&P, like other ratings agencies, has steadily increased its assumptions of
likely losses from subprime mortgage-backed securities, which has created growing
capital shortfalls for MBIA, Ambac, and other bond insurers. Its most recent
cumulative net loss assumptions go as high as 40% for 2006 and 2007 subprime
second mortgages.

In its report Monday, S&P said that it was “circumspect” about assigning stable
ratings to insurers due to the “unprecedented level of mortgage market
deterioration that has occurred” over the last several months. “Accordingly, we
will still assign negative outlooks to those firms with significant exposure to
domestic nonprime mortgages, or meaningful lower credit quality exposures,” S&Psaid.

The continued uncertainty about the outlook led to some caution among
participants in the municipal bond market, which has been roiled in recent weeks
by the problems facing the likes of MBIA and Ambac.

“You need to have your triple-A bond insurers without a negative outlook,” said
Ken Meiselman at J.B. Hanauer & Co., in Parsippany, NJ.

One of the authors of the S&P report said that part of the reason for MBIA
retaining a negative outlook on its rating was because of questions that remain
on the whole restructuring concept.

The idea of “splitting companies happened very recently, and there is a lot of
uncertainty around it,” said S&P analyst Robert Green. “The companies who are
thinking about it are so early along in the process that from an analytical
perspective, there are uncertainties about what the companies will look like in
risk profile and capital supporting its risk,” areas where there is little detail
available, even to S&P, he said.

Meantime, among the small bond insurers, S&P cut Financial Guaranty Insurance
Co.’s rating to A from AA, and Security Capital Assurance from to A- from AAA.
ACA Capital Holdings (ACAH) keeps its junk-level CCC rating with developing
implications.

Moody’s Investors Service is expected to release its review of the ratings of
major bond insurers before the end of February. Moody’s has both MBIA and Ambac
on review for downgrade. Fitch Ratings, the last of the big three rating
agencies, already cut its rating on Ambac to AA in January, and it put MBIA on
RatingsWatch negative earlier this month.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com

(Kathy Shwiff and Kate Haywood contributed to this report.)

(END) Dow Jones Newswires

February 25, 2008 17:06 ET (22:06 GMT)

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