NEW YORK (Bloomberg) - MBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will raise as much as $1 billion by selling a stake to private equity firm Warburg Pincus LLC.

MBIA, the world's biggest bond insurer, rose 13 percent in New York Stock Exchange composite trading as the capital increase offset the company's warning of "significantly" higher losses from the securities it guarantees. Warburg Pincus will buy $500 million of common stock and take up to $500 million in a rights offering next quarter, Armonk, New York-based MBIA said yesterday.

The added capital may help avoid a cut in MBIA's AAA credit rating, which is under scrutiny by Moody's Investors Service, Fitch Ratings and Standard & Poor's. MBIA stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA stamp would endanger those ratings. Without the top ranking, MBIA may be unable to guarantee debt, a business that made up 90 percent of revenue last year.

"It's a positive for the company," said Rob Haines, an analyst at CreditSights Inc., a New York-based independent bond research firm. While not a "magic bullet," the capital infusion may stave off a downgrade for now, he said.

Fitch analyst Thomas Abruzzo stopped short of affirming MBIA's credit rating in a statement yesterday. Fitch will weigh the capital infusion against the added losses and make a decision next week, Mr. Abruzzo said. David Veno, a bond insurance analyst at S&P, and Stanislas Rouyer, at Moody's, didn't immediately return calls seeking comment.

MBIA is among at least eight bond insurers being scrutinized by the ratings companies. The industry guarantees $2.4 trillion of debt and downgrades could cause losses of as much as $200 billion based on falling values of the debt and increased borrowing costs, according to data compiled by Bloomberg.

Writedowns of the value of the debt MBIA guarantees will exceed the $342 million in the third-quarter and the company will set aside as much as $800 million to cover losses it expects to take on securities backed by home equity loans, MBIA said.

MBIA, down 59 percent this year, rose $3.95 to $33.95. The shares jumped as high as $38.19. The stock fell 16 percent on December 5, the biggest drop since October 1987, after Moody's said MBIA was "somewhat likely" to suffer a capital shortfall following a slump in the quality of the assets it guarantees.

Warburg Pincus, the New York-based firm started in 1971, will initially buy 16.1 million common shares at $31 each. The firm will also receive seven-year warrants to buy stock at $40 and have the right to appoint two directors. Warburg Pincus has $2.7 billion in financial-services investments include Bermuda- based insurers Aeolus Re Ltd. and Arch Capital Group Ltd., and Dime Bancorp, the New York-based parent of the Dime Savings Bank.

MBIA said it still may consider other ways to boost capital, including reinsuring its portfolio or issuing debt or hybrid securities.

MBIA's top executives, who include CEO Gary Dunton, said they also will buy $2 million of stock at $31.

Credit-default swaps tied to MBIA dropped 95 basis points to 330 basis points, the lowest since October 30, according to CMA Datavision in London. A decline in the contracts, used to speculate on the company's ability to repay its debt, signals improvement in investor confidence. Contracts tied to MBIA's AAA rated bond insurer, MBIA Insurance Corp., narrowed 37 basis points to 155 basis points, CMA data show.

New York-based Ambac Financial Corp., whose debt ratings are also under examination, jumped $2.58, or 10 percent, to $29.42. Ambac, the second-largest bond insurer, is also rated "likely" to need capital by Moody's.

The ratings firms are examining at least eight bond insurers on concern that a slide in the credit quality of some of the 80,000 securities they guarantee requires them to hold more capital to justify their AAA ratings.

MBIA insures state, municipal and structured finance bonds, including mortgage-backed securities and collateralised debt obligations, securities that repackage pools of debt into slices with varying ratings and risk.

The insurer is among some of the biggest US financial institutions seeking money from outside investors to shore up capital after the value of sub-prime mortgages and CDOs slumped, causing more than $66 billion of losses.

Citigroup Inc., the biggest US bank by assets, received a $7.5 billion cash infusion from the emirate of Abu Dhabi and Countrywide Financial Corp., the biggest US mortgage lender, sold $2 billion of preferred stock to Bank of America Corp. in August to bolster its finances amid the housing slump.

UBS AG yesterday said it will write down its portfolio by $10 billion and raise 13 billion Swiss francs ($11.5 billion) by selling stakes to investors in Singapore and the Middle East. Washington Mutual Inc. said yesterday it will raise $2.5 billion by selling convertible preferred stock.

CIFG Guaranty, a bond insurer owned by Natixis SA was rescued by the French bank's controlling shareholders in a $1.5 billion plan to preserve its top credit rating. Fitch affirmed CIFG's rating on November 22, the day of the announcement.

MBIA's announcement of more losses to come raised concerns among analysts that the company may need even more capital.

"The capital raise clearly takes the near-term pressure off MBIA, from a ratings perspective," Ken Zerbe, an analyst at Morgan Stanley in New York, said in a report to clients. "That said, the size of the expected case loss reserve and the anticipated mark-to-market loss are much greater than expected and bode poorly for the health of the financial guaranty industry."

Mr. Zerbe advises investors avoid financial guarantee stocks for now.

MBIA in October posted a $36.6 million loss because of write-downs on mortgage-related securities and halted stock buybacks to retain capital. So far this quarter, the company "has observed a further widening of market spreads and credit ratings downgrades of collateral underlying certain MBIA-insured CDO tranches," the company said in today's statement.

The fair value of the assets slumped by about $850 million in October, MBIA said.

The added losses and capital being set aside for home equity loans may sap the capital being raised, Gimme Credit analyst Kathleen Shanley wrote in a note to clients yesterday.