Fitch Investors Service Inc. yesterday assigned a AAA rating to AMBAC Indemnity Corp.'s claims-paying ability, giving the bond insurer its third triple-A rating.
Financial Guaranty Insurance Co. is the only other bond insurer to be rated triple-A by Fitch, Moody's Investors Service, and Standard & Poor's Corp.
"On balance, we decided to apply for a Fitch rating because of what we perceive to be the well-rounded, quantitative but reflective research they've done on our industry," said Gayle Robinson, senior vice president at AMBAC. "There has been a growing respect on the analytical and research side, [and] among fixed-income investors about what Fitch has brought to the municipal market."
Robinson also said AMBAC intends to be more active in the structured finance markets in the coming years, and "it is our impression that Fitch's research has been well accepted in the asset-backed market."
A FGIC spokesman said, "Fitch has raised the bar in regard to the quality of analysis of the financial guaranty industry. As a result, investors have come to better understand and appreciate the dynamics of the bond insurance industry. Fitch has also distinguished itself by taking a proactive approach to servicing the needs of investors, and that will serve both FGIC and AMBAC well in the future."
But still undocumented is what practical value a Fitch rating brings an insurer that already has triple-A ratings from Moody's and Standard & Poor's in terms of the liquidity of bonds it insures.
"Fitch has added value to the market and heightened investor awareness about the insurers, but we haven't seen [FGIC's Fitch rating] impact in the trading value" of bonds it insures, said Fred S. Cohen, municipal credit research analyst at Sanford Bernstein & Co.
Fitch's ratings generally have more impact when they differ from those of Standard & Poor's or Moody's, Cohen said, and AMBAC's rating should not have a major effect because it "confirms what was already out there."
Richard Ciccarone, director of tax-exempt research at Kemper Securities Corp., agreed that having a Fitch rating has not added to FGIC's trading value when compared with AMBAC or Municipal Bond Investors Assurance Corp.
However, "as interest rates rise and trading spreads widen, quality spreads become more significant. At that point in time, distinctions based on quality could become more evident," Ciccarone said.
With MBIA, AMBAC, nd FGIC locked in a three-way struggle for dominance of the financial guaranty industry, market sources speculate that MBIA will also seek a Fitch rating, now that its two main rivals are covered by the rating agency.
"MBIA has not applied for a Fitch rating," said Michael Ballinger, vice president at MBIA. "However, we are continually monitoring the market with regard to the value of a Fitch rating."
David T. Litvack, vice president at Fitch, said, "Our standards are generally perceived as the toughest, so you shouldn't expect to see a whole slew of triple-As. However, rating AMBAC is a major breakthrough in Fitch's bond insurance effort and creates a lot of momentum for us."
In assigning its highest rating to AMBAC's claims-paying ability, Fitch cited the firm's "strong capital adequacy, proven risk underwriting practices, low-risk business strategy, experienced management, and asset quality."
The bond insurer has $1.15 billion of qualified statutory capital to pay claims and, at 131 to 1, has the "most conservative" net exposure to capital ratio of the three largest bond insurers, a Fitch press release said. AMBAC's claims-paying ability is further bolstered by its relationships with a variety of monoline and multiline reinsurers, Fitch noted, as well as a $175 million limited-recourse line of credit from Deutsche Bank.
"AMBAC's total claims-paying resources are sufficient to pay all insured bondholder claims, even under stress tests that project economic depressions of unprecedented severity, and still survive to write new business once economic conditions improve," the press release said.
The rating agency also said AMBAC's average return on equity of 15.7% over the last five years and 18.3% return on equity in 1993 led the financial guaranty industry.AMBAC Joins the Triple Triple-A ClubMunicipal bond insurers' claim-paying ratings Duff & S&P Moody's Fitch PhelpsAMBAC AAA Aaa AAA not ratedCapital Guaranty AAA Aaa not rated not ratedCapMAC AAA Aaa not rated AAAConnie Lee AAA not rated not rated not ratedFGIC AAA Aaa AAA not ratedFSA AAA Aaa not rated not ratedMBIA AAA Aaa not rated not rated