Moody's Puts FGIC, XL on Notice for Downgrade; MBIA Outlook Cut By William Selway and Christine Richard Dec. 15 (Bloomberg) -- Moody's Investors Service put FGIC Corp. and XL Capital Assurance Inc. on notice that they may have their Aaa credit ratings lowered and said MBIA Inc. still needs to prove it deserves its top ranking as part of a review of the world's top bond insurers. While the New York-based ratings company stopped short of stripping the Aaa rankings of each insurer, it said it will review FGIC and XL for a possible downgrade and lowered the outlooks for MBIA, the largest bond insurer, and CIFG Guaranty to ``negative,'' indicating they may come under further scrutiny for a cut. The Aaa rankings of Ambac Financial Group Inc., Assured Guaranty Corp., and Financial Security Assurance Inc. were all affirmed. Radian Group Inc.'s insurance unit kept its Aa3 rating. ``We will be focusing on both the effectiveness of the companies' capital remediation plans and their risk management strategies going forward,'' Moody's managing director Jack Dorer said in a statement yesterday. For more than 20 years, the safety of bond insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. The bond insurers promise to make interest and principal payments as they come due on securities if the issuer faltered. The bond insurers have been under scrutiny by Moody's, Standard & Poor's and Fitch Ratings for the past month after declines in the credit quality of the securities they guarantee raised concerns they may need more capital. MBIA, Ambac and CIFG have taken steps to shore up their finances to help avoid a downgrade that would cripple their business. The bond insurers assign their AAA stamp to more than $2.4 trillion of debt. The $470 billion of debt guaranteed by FGIC and XL was also placed on review for a downgrade, Moody's said. `Active Steps' ``Several of the guarantors still have appropriate levels of capitalization to support the current rating and those that may not are taking active steps to strengthen their position,'' Dorer said. New York-based Ambac on Dec. 13 took out insurance on $29 billion in securities it guarantees, transferring the risk to Assured Guaranty. MBIA said this week it will receive a $1 billion investment from private equity firm Warburg Pincus LLC and Groupe Banque Populaire and Groupe Caisse d'Epargne agreed to take control of CIFG from their Natixis SA banking subsidiary and double its capital. The bond insurers reported combined losses of $2.9 billion in the third quarter after writing down the value of some of the asset-backed securities and collateralized debt obligations they guarantee amid the worst housing slump in two decades. FGIC, Blackstone FGIC, controlled by PMI Group Inc., Blackstone Group LP, and Cypress Group LLC, said today it has developed a plan to ensure it can continue to meet Moody's requirements for the top credit rating. The insurer was flagged by Moody's last month as having a ``moderate'' probability of needing to raise additional capital. The ratings company said today it will spend ``the next few months'' reviewing the rating. ``The company's investors have voiced their support for the plan and their commitment to maintaining FGIC's triple-A ratings,'' FGIC said in a statement distributed by Business Wire. ``However, the company can give no assurance that the plan will be implemented to the satisfaction of all rating agencies in a timely manner.'' FGIC insures $315 billion of debt, of which 71 percent are municipal bonds, 23 percent are structured finance and 6 percent are international transactions. That includes $21 billion of home equity loan backed securities and $8.8 billion of securities backed by subprime mortgages. The company also has guaranteed $10.3 billion of CDOs backed by subprime mortgages and other types of loans. The review will focus on assessing the FGIC's efforts to boost capital, Moody's said. ``These plans lack the degree of certainty that would have led to a rating affirmation,'' Moody's said. SCA, XL Security Capital Assurance Ltd., the Hamilton, Bermuda- based parent of XL, was given six weeks to come up with $2 billion more in capital by Fitch Ratings or face losing its AAA rating. The company's capitalization failed one of Moody's tests. SCA's portfolio is ``highly sensitive'' to rising losses in residential mortgage-backed securities from the past two years, Moody's said. The review will take months and will focus on the execution of the company's capital remediation plans. The company has insured $154.2 billion of securities, of which 46 percent is structured finance securities, including $16.1 billion of CDO backed by subprime mortgages and $1.9 billion of subprime mortgage backed securities. ``In the cases in which we moved to a negative outlook or have initiated a review for possible downgrade, capitalization currently falls below Aaa levels or could fall under that level in one of our stress cases,'' Dorer said. MBIA, Ambac MBIA and Ambac lost more than half their stock market value this year on concerns they may lose their ratings. Ambac, the second-biggest in the industry, guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds, while FGIC has insured $314 billion of debt. ``We are pleased with Moody's affirmation of our Triple-A ratings, and we are confident that we will promptly implement the remaining components of the capital plan presented to Moody's and return to stable outlook,'' said Gary Dunton, MBIA chief executive officer. Ambac `Adequate' MBIA raised the capital after Moody's said on Dec. 5 the Armonk, New York-based company was ``somewhat likely'' to face a shortage of capital. Less than a month earlier, Moody's had described a potential shortfall as ``unlikely.'' ``While Moody's believes that the Warburg Pincus investment will address the estimated hard capital shortfall at MBIA, the negative outlook incorporates uncertainty about the performance of the guarantor's portfolio,'' Dorer said in today's statement. Ambac's existing capitalization ``is adequate for its rating level in both the base case and stress case,'' Moody's said. Ambac's decision to reinsure some debt will free up the capital that backs those bonds. ``There exists meaningful uncertainty with regard to the ultimate performance of the firm's insured mortgage-related portfolio in the current environment,'' particularly so-called CDO-squared transactions from this year, Moody's said. These securities ``exhibit significant modeled losses in our stress scenario,'' Moody's said. Record Defaults The bond insurers are paying a price for expanding beyond municipal bonds to guaranteeing debt backed by subprime mortgages and home equity lines of credit as well as CDOs that contain asset-backed debt. CDOs take pools of securities and then slice them into pieces with different credit ratings, from no rating through AAA. CDO-squareds repackage CDOs. Record defaults on the subprime debt contained in the bonds sparked losses that have spread throughout the credit markets, forcing the writedowns by banks. The collapse of the U.S. subprime mortgage market has led to about $76 billion of losses at securities firms and banks this year. Subprime loans are made to people with poor credit. To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net ; Christine Richard in New York at crichard5@bloomberg.net Last Updated: December 15, 2007 00:01 EST