Bond Insurers Cut Ties With Ratings Agency
For bond insurers, maintaining the highest of credit ratings is of the utmost importance in order to attract new business. So what do troubled bond insurers do when they don’t like their credit ratings? They fire the ratings company apparently. Bloomberg reported that Ambac Financial has terminated it’s contract with Fitch Ratings in what has become a disturbing trend.
The second-largest bond insurer is reevaluating its ratings needs as it realigns its business, New York-based Ambac said today in a statement. “As part of this review, we have asked Fitch to remove its ratings on Ambac and all its subsidiaries effective immediately,” the company said.
Ambac’s request follows one by larger rival MBIA Inc., which in March asked Fitch to stop providing a financial strength rating on its insurance unit. In September, Radian Group Inc., which owns mortgage and financial guaranty companies, asked Fitch to stop issuing ratings and said it would no longer provide information to the unit of Paris-based Fimalac SA.
Fitch has been much quicker to the gun than it’s counterparts, S&P and Moody’s, in downgrading credit ratings for troubled firms in the industry. Do theses companies think they can hide from their financial difficulties by killing the messenger?
In what amounts to acts of petulant children, a number of firms have announced they will cease raising new capital since they believe there is no point anymore with the loss of the their highest ratings. I’m sure that is thrilling news for their clients especially communities who have had debt service payments in some cases triple because of the industry’s forays into the disastrous subprime bond market.
Public officials within these communities haven’t stood still while this is all happening and have put increasing pressure on ratings agencies to end the double standard of credit ratings between municipal and corporate bonds. Municipal bond insurance could become a dinosaur in the financial services industry but it will depend if investors are willing to purchase new issues without insurance.
