Ambac, FGIC, May Need Capital for Subprime Losses

Sept. 25 (Bloomberg) -- Bond insurers owned by Ambac Financial Group Inc. and FGIC Corp. may need to raise capital to maintain their top credit ratings if losses worsen on subprime mortgage securities, Moody's Investors Service said.

Under what Moody's called its ``most stressful'' scenario, losses on subprime mortgages backing securities could reach 14 percent, causing Ambac, FGIC, Security Capital Assurance Ltd. and CIFG Assurance North America Inc. to fall short of the capital needed to keep their Aaa ratings.

The companies will ``likely take whatever action is feasible'' to keep their credit ratings, Moody's analysts led by Stanislas Rouyer in New York wrote in a report released today.

The most likely source of losses would be from guarantees the companies made on collateralized debt obligations, which may contain securities backed by mortgages to borrowers with poor credit scores.

``It's clear that the rating agencies are adjusting their assumptions for the financial guarantors,'' said Robert Haines, an analyst with independent research firm CreditSights Inc. in New York. ``They're a little late to the game but they're coming to the realization that there might be losses.''

`Very Unlikely'

Ambac doesn't expect subprime losses to approach levels used by Moody's in its most extreme stress test, Chief Financial Officer Sean Leonard said.

``We consider the Moody's scenario a very unlikely scenario,'' Leonard said. Most of the CDOs backed by subprime mortgages Ambac has guaranteed were rated Aaa before the company insured them, he said.

Brian Moore, spokesman for New York-based FGIC, didn't immediately return calls seeking comment. Messages left with Security Capital's investor relations department and Michael Ballinger, a spokesman for CIFG in New York, also weren't immediately returned.

The stress test is higher than Moody's expected loss rate of 10 percent, under which the rating company predicts the guarantors will experience no material losses.

CDOs take pools of securities and then slice them into pieces with different credit ratings, from no rating through Aaa.

Shares of Ambac closed up 46 cents at $64.06 in New York Stock Exchange Composite trading. SCA shares fell 64 cents, or 2.8 percent, to $22.60.

`Adequately Capitalized'

MBIA Inc.'s bond insurance unit would remain adequately capitalized, despite its exposure to CDOs backed by subprime mortgage-backed securities, Moody's said.

Insurers owned by Financial Security Assurance Inc., Assured Guaranty Ltd., and Radian Group Inc. wouldn't need to raise additional capital under the most stressed scenario because they haven't guaranteed a significant amount of CDOs backed by subprime mortgages, Moody's said.

Earlier this month, Fitch conducted a stress test on the bond insurers' subprime holdings and determined that FGIC would need to raise $387.3 million of capital in its worst-case scenario to maintain its rating.

Standard & Poor's version of a subprime stress test found that all the insurers would have sufficient capital.