SCA's current level of capital is no longer consistent with an investment grade IFS rating, says Fitch

Fitch Ratings has downgraded Security Capital Assurance Ltd (SCA) and its financial guaranty insurance subsidiaries to “BB” from “A”.

It has also removed the affected ratings from rating watch negative, where they were originally placed on 12 December 2007. The rating outlook is negative.

The downgrade of SCA and its financial guaranty subsidiaries centres on Fitch's updated assessment of the company's capital position, a review by Fitch of the company's current capital enhancement plans, and an update on Fitch's current views of US subprime related risks.

The downgrade also reflects what Fitch views as the material erosion in SCA's franchise value and competitive business position following downgrades to well below “AAA” by each of the three major rating agencies.

Fitch believes that SCA's current level of capital and claims paying resources is no longer consistent with Fitch's guidelines for an investment grade IFS rating.

Fitch currently believes that expected losses on SCA's structured finance collateralised debt obligations (SF CDO) backed by subprime residential mortgage backed securities (RMBS) will ultimately fall within a range of about $3 to $4bn.

SCA recently disclosed that it has unilaterally terminated seven credit default swap (CDS) contracts with Merrill Lynch International (MLI) under which XLCA had covered risk of losses on SF CDO transactions.

While Fitch is not in a position to opine on the validity or merits of the termination, Fitch notes that a ruling in SCA's favour could have meaningful positive impact on the company's capital position and credit ratings in the future.

Projected losses on the seven SF CDO transactions account for a material percentage of the aggregate SF CDO expected losses estimated by Fitch.