FGIC could lose its top rating: Metzold

NEW YORK (Reuters) - Bond insurer FGIC could lose its triple-A rating because it may not be worth spending capital to prevent a downgrade, Tom Metzold, a senior Eaton Vance portfolio manager said on Wednesday.

While two other monoline insurers -- MBIA (MBI.N: Quote, Profile, Research, Stock Buzz) and CIFG -- recently announced billion-dollar infusions, FGIC owners might think twice before adding more capital, said Metzold, who manages over $8 billion of municipal bonds at the Boston-based Eaton Vance.

"I will not be surprised if FGIC loses its triple-A," Metzold at the Reuters Investment Outlook 2008 Summit in New York.

"It would not be a good return on their equity to put up that much more capital given how thin the margins are in the municipal bond (insurance) industry," he added.

FGIC, partially owned by the Blackstone Group and PMI Group Inc (PMI.N: Quote, Profile, Research, Stock Buzz), is the fourth largest insurer in the municipal bond market.

Moody's Investors Service and other rating agencies have warned that FGIC and other insurers could lose their triple-A ratings if monolines do not have enough capital to pay claims on faltering mortgage-backed bonds.

MBIA has since secured $1 billion from buyout firm Warburg Pincus WP.UL, and CIFG, owned by French bank Natixis (CNAT.PA: Quote, Profile, Research, Stock Buzz), got $1.5 billion of fresh capital in November.

Nevertheless, Moody's Investors Service last week said CIFG was most likely to fall below the capital benchmarks for a "triple-A" rating.

Metzold had a gloomier outlook on CIFG, saying that the capital infusion was a temporary solution and CIFG could eventually go out of business.

He said he has asked Financial Security Assurance, the only major muni bond insurer not dented by the subprime crisis, to wrap bonds already insured by CIFG.

The loss of triple-A ratings could trigger downgrades of securities that monolines insure, hurting the prices and liquidity.

Still, the market is overreacting, Metzold said.

"We've actually been buying bonds cheaper with insurance than without insurance for the exactly the same underlying credit. That doesn't make sense, but there is irrational behavior in the market right now."

Insurers got burned by their own greed, Metzold said. Seeking higher returns, they have diversified from virtually riskless munis into structured securities and mortgage-backed bonds that have been hit by subprime crisis.

Given insurers' troubles, more municipalities now rely on their own ratings when they sell debt. Metzold welcomed that trend: "I much rather have much less bond insurance and let my credit analysts do what they do best."

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

(Reporting by Anastasija Johnson; editing by Leslie Adler)