Credit ratings agencies gave a less than enthusiastic welcome to XL Capital Ltd.'s plan to extricate itself from potential future costs relating to affiliate Security Capital Assurance Ltd. (SCA).

Both Moody's Investors Service and AM Best put the company on review for possible downgrade, pending the successful completion of XL's efforts to raise $2.5 billion in capital.

Ratings are designed to reflect an insurance company's ability to pay claims and downgrades can have a serious impact on insurance companies' ability to write business.

Meanwhile Fitch downgraded Bermuda-based SCA, despite the agreement which will see XL pay the bond insurer $1.78 billion, plus eight million shares.

Moody's put XL's Baa1 senior debt rating and the A1 insurance financial strength ratings of XL's insurance operating subsidiaries on review for possible downgrade.

The review for possible downgrade reflects the near-term execution risk associated with the equity and hybrid security offerings given the substantial size of the capital raise relative to XL's current market capitalisation.

"If XL successfully completes the equity and hybrid capital raise as planned, then Moody's would likely confirm the ratings," the agency said in a statement yesterday.

"If the company does not successfully complete the capital raise as planned, then XL's ratings are likely to be downgraded, possibly more than one notch."

AM Best placed the financial strength rating of A and issuer credit ratings of "a" of XL Capital Group and its members under review with negative implications following Monday's announcement.

Best also has placed the ICR of "bbb" and all debt ratings of the holding company, XL Capital Ltd. (Cayman Islands) under review with negative implications.

"While the agreement with SCA alleviates significant concern relative to any potential ongoing exposure imposed on XL Capital's balance sheet, the magnitude of the cost associated with this solution has required XL Capital to raise additional capital," Best said in a statement yesterday.

"In AM Best's opinion, the agreement with SCA significantly reduces the uncertainty regarding what had become a serious encumbrance to the company; however, AM Best remains concerned with the prospective impact this issue may have had on XL Capital's market profile and the potential effect on the company's operations and competitive position.

"Accordingly, the company will remain under review with negative implications pending the successful issuance of its ordinary shares and equity security units followed by A.M. Best's assessment of XL Capital's core business franchise and the containment of any negative effects that may have occurred."

The ratings on SCA's bond insurance and reinsurance units were cut to CCC by Fitch Ratings after the company announced a plan to tear up almost $4 billion of guarantee contracts.

XL Capital Assurance and XL Financial Assurance were lowered six levels to CCC from BB by Fitch, which said it would continue to review the ratings.

The move relates to a deal between SCA and Merrill Lynch to cancel almost $4 billion in contracts. Fitch said if the deal isn't completed, SCA's insurers are at risk of being taken over by regulators.

"If regulatory intervention were to occur, Fitch would expect to downgrade SCA's insurance financial strength ratings to reflect a default status," the credit rating company said.