One on One with Jim Ryan, Bond Insurer Analyst , Morningstar
Monday, February 25, 2008
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SUSIE GHARIB: Back now to our top story, that good credit news about the nation's top bond insurers. Joining us now with more analysis, Jim Ryan. He's bond insurer analyst with Morningstar. Hi, Jim.
JIM RYAN, BOND INSURER ANALYST, MORNINGSTAR: Hi. Good afternoon.
GHARIB: So are the bonds insurers out of the woods?
RYAN: No, not yet. You know, there's a whole lot left to play out in this story. Most of it has to do what's going to happen with mortgages later on this year. If we could see that delinquencies would level off, we'd feel a lot more comfortable. But if they continue to rise, this story may still have quite a bit to play out.
GHARIB: So could the bond insurers like MBIA and Ambac lose their triple-A credit rating in the future?
RYAN: Oh, sure. Again, if you do have a surge in defaults which maybe causes some defaults in some of the bonds, yeah, you could see the rating agencies coming back and asking for more capital to keep the triple- A.
GHARIB: So is that why we heard late this afternoon that MBIA announced that it will be cutting its dividend? Is it doing that as a precautionary move to preserve its credit rating?
RYAN: Sure. It's doing it to preserve capital and cash flow. Most of the companies are doing everything possible to keep their capital position intact at the moment.
GHARIB: Now, talking about the capital position, S&P said today that it reaffirmed the bond ratings because it felt that the financial strength of these bond insurers was more secure given that they've gotten some capital infusions, about $2.5 billion in the case of MBIA, possibly $3 billion in the case of Ambac. Is that enough money to alleviate fears of default or do they need to raise more money?
RYAN: For everyone that's a best guess scenario. If you were to look at it right now and say based upon the claims that we've seen and what they're projecting, they have way more than enough capital to pay the claims. The key that's coming down is that the rating agencies are saying, well, what happens in the future? What if in the next three months, the projections that we're running are true and that there's 21 percent sub- prime defaults and things like that? If things get bad enough, yeah, they will be asked to raise capital again.
GHARIB: We've been talking mostly about the nation's biggest bond insurers, but what about the smaller ones? What if one of those defaults? What would be the ripple effect of it, the impact?
RYAN: It certainly won't be as bad. They do have a smaller portfolio but there will be some sort of an effect on it. Someone like Security Capital who was downgraded today to I believe it was an A-minus or an A will probably have some ramifications from bonds that they've insured which may have to be written down. As to how bad it is we don't know. We don't think it's terrible and most of the rating agencies don't think so either at this time.
GHARIB: The stocks of MBIA and Ambac as you know surged today. What's your recommendation on them? Are they still too risky or is there some up side to owning them?
RYAN: Well, our feeling right now is that this is still a very speculative situation and we are not putting a fair value estimate on the stocks or I should say we have not until today. We feel that it's speculative to own the stocks and that any investors should be aware that if they were to buy into this they could lose their whole investment. That said with....
GHARIB: Well....
RYAN: ...with S&P confirming the triple-A today and if Moody's were to take a similar action, we would consider putting our ratings back on the stocks and giving a value to them.
GHARIB: Looking at the bond insurers, which are the best ones to own from a stock investors point of view? Are there any?
RYAN: Right now again we feel that they're all speculative and that it should be approached with caution.
GHARIB: We're going to have to leave it there. Jim, thank you so much.
RYAN: Thank you.
GHARIB: My guest tonight Jim Ryan, bond insurer analyst with Morningstar.
