Fitch Comments on Impact of Ambac Downgrade on Insured Municipal Bonds

Business Wire, Jan 22, 2008

NEW YORK -- On Jan. 18, 2008 Fitch Ratings downgraded the insurer financial strength (IFS) ratings on Ambac Financial Group Inc.'s affiliated insurance entities (Ambac) to 'AA' from 'AAA', and they remain on Rating Watch Negative (RWN). The IFS rating downgrades resulted in corresponding downgrades on approximately 137,000 Ambac-insured municipal bonds.

Consistent with Fitch's previously stated policy, ratings on Ambac-insured bonds with Fitch underlying ratings equal to or higher than Ambac's current IFS rating will now be rated based on the level of the underlying rating. Therefore, 261 bonds with underlying ratings of 'AAA' remained at 'AAA'; 757 bonds with underlying ratings of 'AA ' were downgraded to 'AA ' from 'AAA', and 4,234 bonds with underlying ratings of 'AA' were downgraded to 'AA' from 'AAA'. The ratings on the above noted insured bonds with underlying ratings from 'AAA' to 'AA' are not on Rating Watch Negative, unless the underlying ratings themselves are on Rating Watch Negative. Approximately 132,000 Ambac-insured bonds with Fitch underlying ratings lower than 'AA', or which do not carry underlying ratings from Fitch, were downgraded to 'AA' from 'AAA', and are on Rating Watch Negative.

Fitch notes that insured municipal bonds are in fact 'double-barreled' securities. That is, debt service is paid to the bond's paying agent by the issuer, and it is only if the issuer fails to make timely payments that the financial guarantor is required to make payments on its behalf. Fitch notes that underlying defaults on insured municipal bonds are extremely rare. Financial guarantors such as Ambac will generally not originate policies on municipal bonds with underlying credit quality that they deem to be below investment grade. Based on Fitch's municipal default studies, investment grade municipal bonds in sectors that are typically insured have cumulative default rates well under 1%, which is lower than similarly rated bonds in non-municipal sectors. Financial guarantor loss ratios on insured municipal bonds are also quite low and consistent with Fitch's findings. Fitch notes further that the capital pressures experienced by Ambac and some other financial guarantors have been due almost entirely due to their exposures to downgraded insured structured finance transactions, not municipal bonds.

Furthermore, Fitch notes that Ambac-insured municipal bonds still benefit from Ambac's insurance policies, notwithstanding Fitch's downgrade of Ambac's IFS rating and regardless of whether or not Ambac remains an active financial guarantor. Fitch notes that in terms of its universe of insurer financial strength ratings, 'AA' denotes very strong capacity to meet policyholder and contract obligations on a timely basis. Finally, a financial guarantor is obligated to pay claims on defaulted bonds as the principal and interest come due and with no forced acceleration. Therefore, ability to pay claims is expected to be exceptionally strong over the short- to medium-term time horizon.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.