By Dan Wilchins
NEW YORK (Reuters) - MBIA Inc
Standard & Poor's said it had grown more confident that MBIA could raise capital after the insurer sold some $2.6 billion of debt and equity in the first two months of 2008. The company said it was eliminating its dividend, which should also boost capital. MBIA's shares rose nearly 20 percent, while the broad stock market also rallied.
But the outlook for MBIA's ratings over the next six months to two years remained negative because of the size of potential losses compared with the insurer's capital cushion, S&P said. Moody's Investors Service and Fitch are both still considering cutting the top ratings for MBIA Insurance Corp, the company's main operating unit.
The bond insurance crisis, however, is far from over. The main unit at Ambac Financial Group Inc.
Bond insurers are expected to make big payouts in coming years after guaranteeing repackaged subprime mortgage bonds and other risky debt. Market participants cannot easily estimate how big losses will be for the insurers, which guarantee more than $2.4 trillion of securities.
"The root cause of this stuff is still going on -- if subprime mortgages continue to default at an alarming rate, it will come back to haunt them. They're not out of the woods yet," said Jim Ryan, analyst at Morningstar in Chicago.
Difficulty in nailing down the size of expected losses makes it hard to determine how much capital the insurers need long-term. New York Insurance Superintendent Eric Dinallo is working with the bond insurers to ensure they are able to pay their policies and retain their top credit ratings.
Ambac is expected to raise about $3 billion in a deal it is working out with banks, regulators, and other parties, a person familiar with the situation said.
That would be more than enough to cover the $400 million shortfall that S&P sees for the insurer now. Even if Ambac is unable to complete a multi-billion-dollar deal, other moves like buying reinsurance could eliminate the shortfall, the rating agency said.
Dresdner Bank's head of investment banking, Stefan Jentzch, said the bank supports the rescue package currently being considered for Ambac.
Allianz's
SPLITTING THE BABY
Given the potential losses the bond insurers face, several are looking at splitting their municipal bond insurance business, which is likely to face low payouts, from their other operations, which may face higher insurance losses.
FGIC Corp, whose main insurance unit was downgraded by Standard & Poor's on Monday, asked regulators to be allowed to split, while MBIA's chief executive told Reuters last week that he would like to have structured finance and muni bond insurance as separate units underneath the company's holding company.
Ambac is also looking at splitting its businesses, according to people familiar with the matter.
Dividing up the businesses is difficult, and may trigger lawsuits unless executed carefully, because some creditors may end up worse off.
RATINGS CRUCIAL
Holding onto top credit ratings is crucial for bond insurers, which guarantee municipal bonds as well as repackaged debt like subprime mortgage bonds against default. If a bond insurer loses its top ratings, the bonds it guarantees are usually downgraded as well.
Investors that can only hold top-rated instruments would have to sell billions of dollars of securities, lifting borrowing costs for cities and consumers and triggering big losses for banks.
Oppenheimer & Co analyst Meredith Whitney estimated last month that banks could write down $70 billion from their exposure to Ambac, MBIA, and ACA Capital Holdings
Fitch Ratings said on Monday that Citi, Merrill Lynch,
Hopes that investors would not have to dump MBIA-insured bonds lifted the stock market, with the Standard & Poor's 500 index <.SPX> ending up 1.38 percent at 1,371.80 on Monday. As stocks rose, prices for Treasury bonds, which are seen as safe investments, fell.
Shares of bond insurers surged on hopes the companies were further along in fixing their problems. MBIA closed up 19.7 percent at $14.58, while Ambac rose 15.9 percent to $12.41. Both trade on the New York Stock Exchange.
(Additional reporting by Jonathan Stempel, Dena Aubin, Karen Brettell and Neil Shah in New York; Patricia Nann in Frankfurt; and Andrew Hurst in Zurich; Editing by Leslie Adler)
