MBIA and Ambac downgraded by S&P

MBIA Insurance Corp. and Ambac Assurance Corp., both of New York, had their financial strength ratings downgraded to AA by Standard and Poor's today. The bond insurers were also placed on CreditWatch with negative implications. Previously, both were AAA-rated. A combination of the crumbling U.S. residential mortgage sector and problems with financial flexibility contributed to the downgrade. The companies’ parents, Ambac Financial Group Inc. of New York and MBIA Inc. of Armonk, N.Y. have also been lowered to “A” and “A-“ from “AA” and “AA-,” respectively. Ambac Assurance and MBIA Insurance are also facing downgrades from Moody's Investors Service. The Aaa ratings of both companies are now under review by the New York-based ratings agency. MBIA Inc. is also on review for a possible downgrade of its Aa3 senior debt rating. Securities that are guaranteed by both are also facing reviews for possible downgrades, except for those with higher public underlying ratings. MBIA's credit profile doesn't match its top-shelf triple-A ratings, as the company's business prospects and financial flexibility have diminished, Moody's said in its report. Most likely, the company's insurance financial-strength rating will fall into the Aa range, but a downgrade into the single-A category is also possible. Ambac's ratings review follows a "substantial" decline in the company's market capitalization and the high spreads on its debt securities after the company raised $1.5 billion of capital in March, according to the Moody's report. Projected losses on the company's insured portfolio, especially on its mortgage-related exposures, are pressuring the company's triple-A ratings. Ambac's insurance financial strength will most likely remain in the Aa category following the downgrade, Moody's said. This news is the latest blow to Ambac. The bond insurer is facing removal from the S&P 500 index, to be replaced by Lorillard Inc., a cigarette producer in Greensboro, N.C.