S&P has lowered its counterparty credit, financial strength and financial enhancement ratings on MBIA Insurance and National Public Finance Guarantee to single-B from double-B plus and to triple-B from single-A respectively. At the same time, it has lowered the counterparty credit rating on MBIA Inc to single-B minus from double-B minus. While the outlooks on MBIA Insurance and MBIA Inc remain negative, the outlook on National is developing.

The agency says the downgrades on MBIA are due to its stress-case loss projections for the company's ABS CDOs and its CRE-related exposures now showing as significantly higher than previously projected. However, these loss expectations do not require immediate cash outflows and the company has adequate liquidity for the next few years, S&P notes.

For the CRE exposure, S&P says it now views this asset class as being under moderate stress. It has modified its methodology to exclude any previously applied diversification benefits. This change in methodology results in a substantial increase in stress-case losses.

In addition, changes to the modelling methodology for assessing RMBS and updated criteria for assessing CDOs - both ABS and CRE backed - have resulted in higher stress environment loss projections for these asset classes.

The rating action on National is related to the rating action on its sister company MBIA Insurance. Although National and MBIA Insurance are separate legal entities, they both are subjects of litigation that seeks to void the restructuring undertaken in 2009 that split off the municipal business (SCI passim). As long as that litigation is unresolved, the agency believes there is a risk that the two companies could be required to be recombined or that National would be required to bolster MBIA Insurance's capital.

As such, the MBIA Insurance rating acts as an anchor on the National rating. Given the possibility that a downgrade could move the rating on National nearer to the rating on MBIA, S&P says it is constraining the National rating at two rating categories higher than MBIA.

The rating action on MBIA Inc, meanwhile, reflects the downgrades to its key operating subsidiaries MBIA Insurance and National. However, MBIA Inc's liquidity is currently strong - bolstered in 2010 by a small dividend from Cutwater and a tax refund. Cash on hand and cash inflows expected in the next few years adequately cover the holding company's debt-service and operating-expense obligations.

Currently, MBIA Inc's cash and short-term investments on hand plus expected cash inflows are sufficient to cover about 3.8 years of cash outflows, the agency says. The company faces debt maturities of US$91m in 2011, with the next maturity in 2022.

The negative outlook on MBIA Insurance reflects the possibility that adverse loss development on its structured finance book could continue, diminishing liquidity and weakening capital. Liquidity is currently adequate to meet projected claims payments over the next several years, but there could be increased losses and earnings volatility.

The outlook on National is developing. The stand-alone assessment incorporates S&P's view that National's capital adequacy currently meets its double-A standard and the expectations that National could be successful in its efforts to re-establish its presence in the municipal market. Success in this regard - as demonstrated by competitive market share, premium pricing power and enhanced financial flexibility -could ultimately lead to ratings in the double-A category.

Finally, the outlook on MBIA Inc is negative, reflecting the potential for liquidity to weaken over time due to access to cash subsidiaries being constrained as a result of adverse litigation outcomes. However, in the next few years liquidity will be adequate to meet debt-service and holding-company obligations, including operating expenses.