Corporate Default Risk Soars to Record on Ambac Ratings Cut

[Purveyor]

Jan. 21 (Bloomberg) -- The risk of European companies defaulting soared to a record on concern credit ratings cuts at bond insurers Ambac Financial Group Inc. and MBIA Inc. may trigger forced asset sales and worsen credit market turmoil.

Credit-default swaps on the Markit iTraxx Europe index of 125 companies with investment-grade ratings jumped 10.25 basis points to 82.5, according to JPMorgan Chase & Co., the highest since the index started in 2004.

Ambac was stripped of its top AAA grade by Fitch Ratings on Jan. 18 after the New York-based company abandoned plans to raise new equity. Moody's Investors Service and Standard & Poor's are reviewing Ambac and MBIA, throwing doubt on the ratings of the $2.4 trillion of debt guaranteed by bond insurers and threatening forced sales by investors that are restricted to holding the highest-grade bonds.

``The major risk for credit markets remains forced selling on the back of downgrades of the insurers,'' said Jochen Felsenheimer, the Munich-based head of credit derivatives research at UniCredit SpA, Italy's biggest bank. ``The problem right now is there seems no way out.''

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

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http://www.bloomberg.com/apps/news?pid=20601087&sid=aQXqrzKQsO98&refer=home

[sendero]

1. For those who haven't been following this..

... these insurers "insured" the value of these crap subprime mortgage tranches, providing the ILLUSION that they were a safe investment.

Companies that have these assets haven't had to write them all down because they are "insured".

But guess what, the notional value of the amount these companies have insured is 1000+ times the amount of capital they have. They are all basically bankrupt already, but once it is formalized (and it will be) all of these assets will have to be marked down to pennies on the dollar.

THIS is going to generate the second leg down in this mess, and it is going to be big.