Moody's Likely to Cut Bond Insurers

Moody's Investors Service will probably downgrade some bond insurers this month, the ratings agency said Friday, in what could become yet more trouble for the beleaguered bond insurance industry and the trillions in debt it insures.

In a conference call, Ted Collins, managing director of the financial institutions group at Moody's, said the ratings agency will probably slash the "AAA" financial-strength ratings on some bond insurers when a review is completed later this month.

Top-notch financial strength ratings are vital for bond insurers to continue winning new business. These companies write insurance policies promising to repay bondholders when bond issuers default.

The once-staid industry formerly focused almost exclusively on insuring relatively safe government debt, but the sector has branched out into mortgage loans and complicated structures secured by risky home loans.

Moody's said American consumers _ strapped by the slumping housing market, a spike in unemployment and fears of a recession _ are having more trouble repaying their mortgages.

Much of the debt that bond insurers guarantee faces a greater risk of default because of this deterioration in mortgage credit quality, Moody's said.

Fitch Ratings has already downgraded Ambac Financial Group Inc., Security Capital Assurance Ltd. and Financial Guaranty Insurance Co., which collectively insure more than $1 trillion in bonds. Standard & Poor's on Thursday downgraded Financial Guaranty.

Aside from crippling prospects for a bond insurer's new business, a financial-strength rating downgrade also imperils the value of bonds insured by a downgraded insurer. An insured bond is only as safe as the capital strength of its insurer.

After Fitch downgraded Ambac, the ratings agency downgraded 140,000 municipal bonds insured by Fitch. After downgrading SCA, Fitch downgraded more than 37,000 SCA-insured government bonds.

The two biggest bond insurers, MBIA Inc. and Ambac Financial, combined lost more than $5 billion in 2007 and insure $1.229 trillion in debt.