AMBAC, MBIA lose critical AAA ratings

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AMBAC and MBIA the two largest bond insurers have lost their triple-A rating with Standard & Poors which will make it extremely difficult for them to raise capital and generate new business going forward. We’ve covered how tenuous these bond insurers are in the past, and this downgrade puts them in a world of hurt.

From Market Watch on the bond insurer downgrade:

Standard & Poor’s Rating Services said on Thursday that it downgraded the bond insurance units of Ambac to AA from AAA.

The insurers will generate less new business, have less financial flexibility and capital levels will be pressured by continued deterioration in the U.S. market for residential mortgage-backed securities and related collateralized debt obligations, S&P explained.

The AA ratings were placed on CreditWatch with negative implications, the agency added.

Bond insurers essentially sell their AAA ratings to borrowers that aren’t rated that highly. Without such top ratings, bond insurers are left with little else to sell.

Bond insurers are important because they guarantee trillions of dollars of debt, including more than $1 trillion of municipal bonds. When they’re downgraded, all the ratings on this debt are downgraded too.

Investors have been worried about bond insurers since late last year, when the subprime mortgage crisis deepened and spread into a global credit crunch. Fitch Ratings downgraded Ambac and MBIA several months ago. This means the impact of S&P’s downgrade on Thursday may be more muted.

“A downgrade which affects over $1 trillion of municipal bonds is a significant event, no matter how much it may have been anticipated, so there may be some recurrence of volatility in the muni credit markets as this news is digested,” said Dick Larkin, director of research at Herbert J. Sims & Co.