Bond Insurer FGIC Misses Deadline And Loses AAA Fitch Rating
According to Bloomberg.com's Christine Richard, Financial Guaranty Insurance Co. (FGIC), the world's fourth largest bond insurer, lost its AAA credit rating after it failed to boost capital by $1 billion before a deadline issued by Fitch Ratings.
Like other bond insurers who ventured into insuring subprime debt, home-equity loans, and collateralized debt obligations, FGIC is feeling the pinch of such investments.
According to the company’s website, FGIC guaranteed $21 billion of home-equity securities, $10.3 billion of collateralized debt obligations backed by subprime mortgages and other loans, and $8.8 billion of subprime mortgage debt.
Extending beyond its standard business of insuring municipal bonds to guarantee subprime debt increased FGIC’s risk. The loss that arose as a result of this risk led Fitch to cut Financial Guaranty--a unit of New York-based FGIC Corp.--two levels to AA for the first time in 17 years.
Loss of the AAA credit rating may limit FGIC’s ability to generate new business. The lower credit rating also jeopardizes the ratings of the bonds that FGIC insures and is likely to cause more turmoil in the financial markets.
FGIC joins the club of other bond insuruers that have recently had their credit rating downgraded. The credit rating of Ambac, the world’s second largest bond insurer, was previously cut by Fitch from AAA to AA. Similarly, Security Capital Assurance Ltd.’s rating was cut from AAA to A.
