財經觀察 2062 --- FT: Solvency concerns around bond insurers

FT: Solvency concerns swirl around bond insurers

Three weeks ago, Wells Fargo filed a notice that it had failed to receive $5.5m of insurance payments.

Payment failures are, of course, an increasingly common feature in the debt markets and this amount is relatively small. This one was significant, though, because the offending party was a bond insurer.

Many of the biggest bond insurers, such as Ambac Financial and MBIA, have stopped writing new business after their credit ratings were slashed on the back of huge losses related to risky mortgages. The use of their triple A rated guarantees was the backbone of huge parts of the credit industry such as securitisation and structured finance; their demise is one reason these parts of the financial markets remain dysfunctional.

The fate of the bond insurers still matters, however. Even though the likes of Ambac and MBIA are not writing any new business, they continue to guarantee or "wrap" hundreds of billions of dollars worth of bonds, from US municipal debt to mortgage-backed securities and complex collateralised debt obligations.

They are also already paying out billions of dollars a year on mortgage-linked bonds that have defaulted. For example, in the first quarter MBIA paid out $614m on defaulted residential mortgage-backed securities. In spite of the pressures wrought by the credit crisis on the biggest bond insurers, or monolines, none of them had so far been forced to cease paying claims.

Soon after Wells Fargo said it had failed to receive the payments, it was deemed that the insurer in question - XL Capital Assurance, part of SCA which is now renamed Syncora - had defaulted. The Syncora payments were stopped on the orders of the New York insurance regulator. The bond insurer may be taken over by regulators if it cannot restructure by the end of the month.

"There are investors out there who rely on the payments from bond insurers," said a lawyer who works with many such investors. "Now that one bond insurer has stopped paying, they are worried that others will too. It is causing a lot of concern."

The Syncora saga has put the spotlight on just one of the concerns around bond insurers - that of solvency.

The solvency concerns around Ambac and MBIA are playing out in different ways. MBIA received regulatory approval to split into two: one business with municipal bonds and one which would have the structured bonds it insured. This, in effect, is seen as a way of protecting municipal holders at the expense of banks and investors who bought insurance on structured finance.

Indeed, a group of investors has already filed a lawsuit contesting the split on the grounds that it is a "fraudulent conveyance" and that holders of some $241bn of insurance policies have been left "stranded in a denuded insurer that will be unable to meet its obligations as they come due". MBIA says the case is without merit. A group of 18 banks has taken the unusual step of filing a joint lawsuit against MBIA's split plans.

"Those seeking to sue MBIA may have an uphill battle on their hands to prove that the rationale behind the transaction was not well founded but rather was irrational, capricious and/or arbitrary," said Rob Haines, analyst at CreditSights. Mr Haines regards MBIA as a better credit risk than Ambac, which is not splitting its municipal and structured finance businesses.

"We expect Ambac's policyholders' surplus to deteriorate to levels dangerously close to regulatory minimum limits," said Mr Haines after the release of Ambac's results this week.

In another trend, some insurers are trying to avoid paying out on claims that have been made. There has been a marked increase in the number of lawsuits that have been filed by bond insurers arguing that they were essentially misled about the assets they were guaranteeing.

A British subsidiary of Ambac filed court papers seeking $1bn in damages from JPMorgan Investment Management. As the investment manager for $1.65bn of assets in the name of Ballantyne, Ambac said JPMorgan placed the assets in "inappropriate securities", including risky mortgage-backed securities.

MBIA recently sued Merrill Lynch, now owned by Bank of America, to avoid pay-outs on $5.7bn of collateralised debt obligations (CDOs) linked to mortgages.

"Using the lawsuits as an attempt not to pay claims is weakening the value of insurance generally," said Arturo Cifuentes, a principal at Atacama Partners, an advisory firm based in New York. "It is a recent development, and one that increases the risks around the value of insurance. It is not just about solvency anymore."

There are other ways the bond insurers still matter. The tranches of CDOs that have insurance on them are often marked at values below similar CDOs without insurance. This is because the bond insurers have some of the rights that can determine whether a CDO is liquidated, which can affect the value of the tranche. Banks are seeking to tear up many of these contracts in order to get the rights back.

Whether the bond insurers can indeed pay could yet become a political issue. The prospect of Tim Geithner, Treasury secretary, having an interest in the outcome of the dispute around MBIA's split is one of the questions being played out in court.

"The federal government is one of the largest victims . . since it has tens of billions of dollars of exposure to the affected securities by virtue of loss-sharing arrangements it recently entered into with certain banks," said the legal complaint filed against MBIA.