msnbc.com news services
updated 1/31/2008 2:27:24 PM ET 2008-01-31T19:27:24

MBIA Inc. reported write-downs of $3.5 billion on souring credit derivatives in the fourth quarter Thursday, raising the possibility that the world’s largest bond insurer could lose its top credit rating.

Continued weakness in the bond insurance market may put struggling banks in a precarious position. Banks, which have reduced portfolio values by more $140 billion during the second half of 2007 in a deteriorating mortgage market, might be forced to take further write-downs tied to bonds insured by companies like MBIA.

MBIA said it is considering new options to raise capital.

The insurer lost $2.3 billion in the fourth quarter, or $18.61 per share, compared with earnings of $181 million, or $1.32 per share, during the same period the previous year.

MBIA’s Chief Financial Officer C. Edward Chaplin said on Thursday the bond insurer would continue to work with Moody’s Investors Service to keep its credit rating at “triple A” and believes the outcome of a Moody’s review will be “affirmative.”

Chaplin said MBIA’s cash balance at year-end was $434 million, with annual debt service of $80 million and no debt maturities until 2010.

He said no cash at the holding company level was pledged to third parties and all was available for expenses and debt service.

Moody’s said earlier this month that it was reviewing MBIA’s top rating for a possible downgrade.

Chaplin made his comments on a company conference call that followed its fourth-quarter earnings report earlier Thursday.

Analysts polled by Thomson Financial, on average, forecast a loss of $2.97 per share for the quarter for MBIA.

During the quarter, MBIA reduced the value of its credit portfolios by $3.5 billion, reducing earnings by $18.04 per share. The losses were primarily tied to the reduced value of collateralized debt obligations in its insured portfolio.

So-called CDOs are complex financial instruments that combine various forms of debt.

MBIA also took a $713.5 million pretax loss on its exposure to rising delinquencies and defaults among home equity products. Of the $713.5 million, $100 million was placed in reserve to cover potential future losses.

The beleaguered bond insurer also reduced the value of its 17.4 percent stake in reinsurer Channel Re to $0 from $85.7 million.

“The effect of these reserving and impairment activities on our capital position will be more than offset by the successful completion of our capital plan, which will increase our capital position by well over $2 billion,” Gary Dunton, MBIA’s chairman and chief executive, said in a statement.

MBIA raised more than $1.5 billion in recent months to try and maintain its critical “AAA” rating. The company raised $1 billion through the offering of surplus notes and another $500 million through a direct investment by private equity firm Warburg Pincus, which closed Wednesday. Warburg Pincus has also pledged to backstop an additional $500 million rights offering.

Continued weakness in the bond insurance market could put already struggling banks in a precarious position. Banks, which already reduced portfolio values by more $140 billion during the second half of 2007 due to deteriorating mortgage market, might be forced to take further write-downs tied to bonds insured by companies like MBIA.

Oppenheimer & Co. analyst Meredith Whitney said banks’ could take up to $70 billion in additional write-downs because of the faltering bond insurers.

Struggles at bond insurers would also make it more expensive for municipalities — ranging from local governments to school districts — to raise money to fund new projects.

The bond insurance market is in the midst of a major upheaval after ratings agencies began reviewing their operations during the fourth quarter. Due to rising delinquencies and defaults on mortgages, ratings agencies believe bonds and securities backed by those troubled loans will increasingly default as well, forcing bond insurers to pay out claims.

Bond insurers make principal and interest payments when issuers default. Under extreme loss scenarios, ratings agencies believe many bond insurers do not have enough cash available to pay out claims, which has forced the companies to either raise new capital or face a downgrade from the “AAA” financial strength rating.

Bond insurers essentially need “AAA” ratings to book new business.

Fitch Ratings already downgraded Ambac Financial Group Inc., Security Capital Assurance Ltd. and most recently Financial Guaranty Insurance Co. Both Moody’s Investors Service and Standard & Poor’s said they are currently reviewing ratings on bond insurers.

For the full year, MBIA lost $1.9 billion, or $15.22 per share, compared with earnings of $819.3 million, or $5.99 per share, in 2006.

The Associated Press and Reuters contributed to this report.

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