MBIA Inc, the world's largest bond insurer, said it will stop guaranteeing asset-backed securities for six months and plans to split that business from its municipal bond unit, moves aimed at restoring stability in troubled credit markets.
The decision was announced after Standard & Poor's earlier on Monday said it would not cut the company's top-tier credit ratings, causing MBIA shares to rally 19.7 percent and prompting a broader stock market rally.
S&P said it had grown more confident that MBIA could raise capital after the insurer sold some $2.6 billion of debt and equity this year.
MBIA on Monday also eliminated its dividend.
Joseph Jay Brown, MBIA's new chief executive, said in a letter to shareholders that he suspended the writing of new structured finance business for about six months, while the company evaluates its options.
He also said he plans within a five-year period to separate the Armonk, New York-based company's municipal and structured finance businesses. Brown had told Reuters last week that he would like to have the units operate separately underneath the company's holding company.
Eliminating the dividend would save about $174 million a year, he said on Monday.
Everything we are working towards right now is centered on regaining stability, Brown wrote. Continuing uncertainty in the mortgage markets tells me that we can expect a bumpy ride over the coming months and possibly longer.
Separately, Brown said he had follow-up questions about MBIA's preliminary 2007 results released last month, and that he has yet to sign off on them.
S&P said it was no longer reviewing MBIA's AAA rating for downgrade, but said the outlook was negative because of the size of potential losses relative to the insurer's capital.
Moody's Investors Service and Fitch are both still considering cutting the top ratings for MBIA Insurance Corp, the company's main operating unit.
S&P said the main unit at Ambac Financial Group Inc, MBIA's largest rival, may still lose its top ratings.
A deal to provide that insurer with more capital will not likely be signed until early next week, a person briefed on the matter said.
Bond insurers are expected to make big payouts in coming years after guaranteeing repackaged subprime mortgage bonds and other risky debt. Market participants cannot easily estimate how big losses will be for the insurers, which guarantee more than $2.4 trillion of securities overall.
If subprime mortgages continue to default at an alarming rate, it will come back to haunt them, said Jim Ryan, an analyst at Morningstar Inc in Chicago. They're not out of the woods yet.
Shares of MBIA closed up $2.40 at $14.58, while Ambac shares rose $1.70, or 15.9 percent, to $12.41. Both trade on the New York Stock Exchange. Hopes that investors would not have to dump MBIA-insured bonds lifted the stock market, with the Standard & Poor's 500 index .SPX ending up 1.38 percent.
SPLITTING THE BABY
New York Insurance Superintendent Eric Dinallo is working with the bond insurers to ensure they are able to pay their policies and retain their top credit ratings.
Ambac is expected to raise about $3 billion in a deal it is working out with banks, regulators, and other parties, a person familiar with the situation said.
That would be more than enough to cover the $400 million shortfall that S&P sees for the insurer now.
Dresdner Bank's head of investment banking, Stefan Jentzch, said the bank supports the rescue package currently being considered for Ambac.
Allianz's Dresdner is one of the banks working with Ambac. Others include Barclays Plc, BNP Paribas SA, Citigroup Inc, Royal Bank of Scotland Group Plc, Societe Generale, UBS AG and Wachovia Corp.
FGIC Corp, whose main insurance unit was downgraded by S&P on Monday, has asked regulators to be allowed to split. Ambac is also looking at splitting its businesses, according to people familiar with the matter.
Dividing up the businesses is difficult, and may trigger lawsuits unless executed carefully, because some creditors may end up worse off.
Brown, who ran MBIA earlier this decade, was reinstalled as chief executive last week, after the ouster of Gary Dunton.
Maintaining top credit ratings is crucial for bond insurers, which guarantee municipal bonds as well as repackaged debt like subprime mortgage bonds against default.
If a bond insurer loses its top ratings, the bonds it guarantees are usually downgraded as well.
Investors that can only hold top-rated instruments would have to sell billions of dollars of securities following a downgrade, lifting borrowing costs for cities and consumers and triggering big losses for banks.
Oppenheimer & Co analyst Meredith Whitney estimated last month that banks could write down $70 billion from their exposure to Ambac, MBIA, and ACA Capital Holdings.
Fitch Ratings said on Monday that Citi, Merrill Lynch, and UBS could face more pressure on their debt ratings because of their exposure to bond insurers.
(Additional reporting by Jonathan Stempel, Dena Aubin, Karen Brettell and Neil Shah in New York; Patricia Nann in Frankfurt; and Andrew Hurst in Zurich; Editing by Leslie Adler, Gary Hill)