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January 18, 2008, 3:07 pm
Fitch Downgrades Ambac…Others to Follow?
Posted by David Gaffen
The market had one more surprise in store. Fitch Ratings cut its credit rating on Ambac Financial Group to AA from AAA. Shares dropped sharply on the news but then turned around and were lately working back into positive territory.
Of late Ambac was up 3%, after a brief dip into negative territory, on the news that the firm’s credit rating had been lowered. This isn’t the full monty here — Moody’s and Standard & Poor’s still have triple-A ratings on Ambac (both are reviewing those ratings) but it isn’t a positive sign.
Banks’ Muni Bond Exposure
(Source: Citigroup)
Bank Exposure (mil) % of Securities
First Midwest $955 49%
Associated Bancorp $957 29%
Webster Financial $548 23%
Marshall & Ilsley $1304 18%
Fulton Financial $503 18%
Commerce Bancshares $593 17%
Huntington $680 17%
Zions Bancorp $979 17%
US Bancorp $6688 17%
UCBH Holding Co $279 16%
With Ambac having lost its triple-A rating from one agency, it may only be a matter of time before others succumb and lower its rating too, something many an investor has been expecting in recent weeks. The severity of such a downgrade cannot be understated, given that the firm, and its major rival, MBIA, guarantee about $2.4 trillion in bonds that would be faced with downgrades should Moody’s or Standard & Poor’s follow through with moves of their own.
Citigroup banking analyst Keith Horowitz, in a note today, spells out the myriad ways in which banks have exposure to the monoline insurers, including direct credit lines to the insures, credit-default swap counterparty risk on ABS CDOs, and through municipal bond investments on their balance sheets.
“If the rating agencies downgrade the financial guarantors the credit rating will fall to the higher of the underlying bond’s rating or that of the financial guarantor,” he noted. “So if Ambac’s rating were lowered to AA, a BBB muni bond would then be rated AA, rather than AAA. This would likely reduce the market value of the bond, causing a mark to market loss for the investor.”
Many major banks have significant exposure to municipal bonds — as of Sept. 30, 2007, at least 19 banks have 10% or more of their securities exposure in muni bonds, according to Citigroup.
