Hot finance topics

Fitch Ratings slashed FGIC Corp.’s financial strength rating on Wednesday, harming the bond insurer’s chances of winning new business and potentially reducing the value of hundreds of billions of dollars in bonds.

Fitch Ratings cut the bond insurer’s rating to "AA" from "AAA." A bond insurer with a rating below the top-notch "AAA" designation will have trouble competing with other insurers for new business.

Late last year, Fitch said FGIC’s capital cushion was shy by $1 billion. The company, which insures almost $315 billion in debt, said it had a plan to address Fitch’s concerns, but Fitch said FGIC has yet to raise the cash.

FGIC’s capital shortfall has swelled to $1.3 billion, Fitch said.

Fitch this month downgraded Ambac Financial Group Inc. (ABK), one of FGIC’s competitors, after the company gave up trying to raise $1 billion to satisfy the ratings agency.

Bond insurers write insurance policies promising to repay bondholders when bond issuers default. While FGIC and the other major insurers once wrote policies almost entirely to protect bonds sold by government agencies, the companies have branched out into insuring bonds secured by mortgages and other complex instruments.

The plunge in the value of mortgage debt has damaged bond insurers’ balance sheets because of their exposure to more defaults bad credit payday advance. FGIC reported its contracts insuring risky debt lost more than $100 million in value during the third quarter.

Fitch said it will issue a separate release about what the downgrade means for the bonds FGIC insures. After Fitch downgraded Ambac, the ratings agency also downgraded 140,000 municipal bonds insured by the company.

FGIC insures about $220 billion in government bonds.

The company is owned by the mortgage insurer PMI Group Inc. (PMI) and private equity firms Blackstone Group L.P. (BX), Cypress Group and CIVC. 

Source