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From FT.com: More monoline trouble looms

Welcome back the spectre of the monoline downgrade.

And we have a new milestone. SCA became the first of the AAA-badged bond insurers to have its rating slashed to below investment grade. ACA, which succumbed to junk status some months ago, was never rated top notch to start with.

Fitch, of course, was the one doing the downgrading. It cut the financial-strength rating of SCA’s subsidiary XLCA from A to BB, citing an updated assessment of the company’s capital position as well as the “material erosion in SCA’s franchise value and competitive business position.”

The agency now expected losses on SCA’s subprime CDOs to fall between $3bn and $4bn, compared to the company’s resources to cover losses of $4.2bn at the turn of the year. The company, which suspended the writing of new business earlier this month, has said it won’t resume normal operations until it has regained a rating of at least AA, and preferably AAA.

But the signs are not good. Fitch reckons that the insurer would need to raise as much as $5.9bn to regain a triple-A badge.

SCA was swiftly joined in the downgrade camp by FGIC, cut to BBB by Fitch from AA. It is short of between $5.1bn and $5.3bn in capital, compared to levels required for an AAA rating. The insurer has ceased writing new business, as it fights to bring its capital levels back above the regulatory minimum under New York insurance law.

The return of monoline woes may be bad news for Merrill, which has previously taken a sizeable hit from the downgrade of ACA. A legal spat which kicked off between the bank and XLCA last week raises the prospect of further writedowns on exposure to CDOs, after CDS contracts were terminated by XLCA.

Here, courtesy of Bank of America, is a ready-reckoner to remind us of the various monoline woes (though not yet updated for Fitch’s latest on FGIC).
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