More bond insurers seen seeking new capital

NEW YORK (Reuters) - Mortgage insurer MBIA Inc's (MBI.N: Quote, Profile, Research, Stock Buzz) $1 billion capital infusion probably means other bond insurers will take similar steps to retain their credit ratings, Mary Miller, director of fixed-income investing at T. Rowe Price said on Monday.

"I think MBIA is setting the path for the other monolines," Miller said at the Reuters Investment Outlook 2008 Summit in New York. "Having one of those companies fail would be very very bad for the markets and not just for the municipal bond market."

MBIA, the world's largest bond insurer, on Monday said buyout firm Warburg Pincus would inject $500 million of new capital and commit to backstopping a shareholder rights offering of $500 million.

MBIA, on December 6 had said it was looking for ways to shore up its capital base amid investor concern that it could face a severe liquidity crisis amid collapsing values for bonds backed by subprime mortgages.

Miller said some of the problems upsetting markets today can be traced to when MBIA and other monoline insurers strayed from their original area of expertise -- insuring municipal bonds -- and began to insure other credits.

"Where I get concerned about them is when they leave that reservation and start insuring CDOs and other types of credit that in some cases require immediate payment," Miller said.

She noted that when an insured municipal issue defaults, the insurer is obligated to pay principal and interest over the life of the bond. But with CDOs they are on the hook for upfront payments.

Ambac Financial Group Inc(ABK.N: Quote, Profile, Research, Stock Buzz), another major player in credit insurance, said last week it will defend its "triple A" rating.

"My expectation is that the monolines will do whatever it takes to try and preserve their Triple A ratings and to restore their capital," Miller said.

She said the markets have been disappointed by a "lack of transparency" about some of the risks the monolines were facing as sub-prime assets declined sharply in value.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Cal Mankowski, editing by Leslie Adler)