MBIA, Ambac still at risk of downgrades-Barclays

NEW YORK, May 16 (Reuters) - MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group's (ABK.N: Quote, Profile, Research) bond insurance arms remain at risk of downgrade, though the loss of the top ratings would be unlikely to create the systemic meltdown that was previously feared, Barclays Capital said.

MBIA and Ambac, also known as monolines, this month reported losses for the first quarter, weighed down by exposures to risky residential mortgage-backed debt.

"Over the past few months, the level of market interest in the monoline financial guarantors has waned appreciably," Barclays analyst Seth Glasser said in a report sent late on Thursday. However, "many individual insurers remain at heightened risk of losing their AAA ratings."

The ratings of MBIA and Ambac's bond insurance arms were placed on review for downgrade in January by major U.S. rating agencies, sparking a broad sell-off in credit markets as investors fretted a downgrade would create large losses in municipal and other debt.

Moody's Investors Service and Standard & Poor's have since affirmed the ratings at "AAA." Moody's on Tuesday, however, said that incurred losses by the two companies are now "meaningfully higher" than it had expected, and raised concerns about their capital levels.

Moody's also noted that bond insurers have "significant exposure" to second-lien residential mortgage debt, which is experiencing high loss rates.

"Clearly, the degree of future losses on these classes of deals, as well as those classes which have not yet experienced material ratings downside or collateral loss such as Alt-A, remains critical to whether the monolines will need to raise additional capital," said Barclays Glasser.

Plunging prices of the companies' stock and hybrid bonds make it challenging for the insurers' to sell securities to raise capital and outside companies may be reluctant to invest, however.

"We find it increasingly possible that the monolines may not be able to raise the capital required to placate the rating agencies if they again make changes to their capital models in the coming months," Glasser said.