Frederico disputes Moody’s rating cut

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Bermuda-based bond insurer Assured Guaranty’s president and CEO Dominic Frederico is disputing Moody’s ratings cuts.

The municipal-bond insurer whose biggest investor is billionaire Wilbur Ross, was downgraded by Moody’s Investors Service, which cited the industry’s “dramatic decline” since the sub-prime crisis.

Moody’s cut the issuer rating of Assured two levels to Baa2, two steps above junk. Subsidiaries Assured Guaranty Municipal Corp and Assured Guaranty Corp had their insurance financial strength rating lowered two steps to A2 and three levels to A3, respectively.

Assured was the only company left insuring munis after MBIA Inc and Ambac Assurance Corp had their ratings cut during the financial crisis amid losses on guarantees of subprime-mortgage-backed debt. Though insurer Build America Mutual Assurance Co entered the market last year, just four percent of local bonds sold in 2012 had the protection, which once covered more than half the market.

Bermuda-based chief executive Mr Frederico said in a statement that he “strongly disagrees” with Moody’s assignment of an A2 rating to Assured Guaranty Municipal Corp, especially given Moody’s statements in its own release that AGM has capital adequacy ‘corresponding to a high Aa score’ and insured portfolio characteristics that are ‘high investment grade.’

Moody’s based its downgrade on its subjective, qualitative factors of ‘Franchise Value and Strategy,’ ‘Profitability’ and ‘Financial Flexibility’, he said.

“Moody’s ratings now appear to be determined by unsupported qualitative factors and assumptions about future product demand, future profitability and future stock price that have little or no relevance to the Company’s actual ability to meet all of its financial obligations with the highest certainty,” Mr Frederico said in a statement.

“When a company’s financial strength and the quality of its insured portfolio are no longer the dominant factors in its ‘financial strength rating,’ there is a serious flaw in the rating process.”

He continued: “A close reading of Moody’s release also reveals contradictions and inconsistencies that essentially discredit it.

“After announcing its credit watch for Assured Guaranty companies in March 2012, Moody’s published a Summary Rating Rationale, which cited their key rating factors, including their qualitative factors, and placed AGM and AGC clearly in the Aa category.

“In yesterday’s report, Moody’s rated our performance on those same qualitative factors significantly below where Moody’s rated them just ten months ago, even though our actual performance on each of those factors has since been stable or improved and there is general agreement, even at Moody’s, that the economy has improved. This is further evidence that a downgrade is unjustified.

“Another troubling aspect of Moody’s rating process is that it was conducted without the transparency mandated under the Dodd-Frank Act and required by Moody’s own Professional Code of Conduct ...”

Mr Frederico also said: “If we look at the three years since our last detailed Moody’s review, when AGM and AGC were assigned ratings of Aa3, we have materially increased our financial strength while significantly decreasing our insured exposures.

“During this period of global financial stress, Assured Guaranty produced a total of $1.8 billion in operating earnings. We increased statutory capital by $1.4 billion and decreased our statutory insured par in force by $116 billion, which included an $11.1 billion reduction of US residential mortgage-backed securities (RMBS).”

Mr Frederico said the “strong results” certainly should have led, at a minimum, to a rating affirmation.

“Additionally, over the last three years, representation and warranty (R&W) providers have paid or agreed to pay $2.7 billion for R&W breaches in our insured RMBS, bringing the total to date to $2.8 billion, significantly curtailing our exposure to future adverse development in this asset class.

“We have further opportunities to recover more losses from the R&W providers who have not settled but are subject to outstanding litigation that has so far been favourable for financial guarantors. This should further contribute to maintaining capital adequacy.”

He said Assured Guaranty was confident about its ability to serve its markets and build business based on its “proven value proposition and our track record of solid performance”

He added: “We also have confidence that, irrespective of Moody’s action, informed issuers and investors understand our true strength and the value our guaranty provides.

“Assured Guaranty’s board of directors authorised a $200 million share repurchase programme.

“This latest repurchase programme replaces the prior authorisation, under which Assured Guaranty repurchased approximately 2.1 million common shares out of the five million common shares authorised. The funds for this programme will be provided by the parent holding company, Assured Guaranty Ltd., and will have no impact on the capital resources of the financial guaranty subsidiaries.

“Additionally, the Company intends to launch during 2013 a new municipal-only financial guaranty insurer to increase its penetration in the public finance market; it will not carry a Moody’s rating; will continue to pursue strategic insured bond purchases and consensual transaction terminations on favourable terms; and will develop plans to increase capital flexibility within the Assured Guaranty group while maintaining the highest possible ratings at its principal operating companies.”

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