Feb. 26 (Bloomberg) -- MBIA Inc. had its Aaa credit rating affirmed by Moody's Investors Service, removing the threat of an immediate downgrade of the bond insurer that would have sparked losses across the credit markets.

Moody's said it ended a five-week review of MBIA and was satisfied that its capital raising plans and restructuring demonstrated the insurer could withstand losses on subprime debt. The outlook is negative, indicating that the rating may be considered for a downgrade in the future, though no cut is imminent, New York-based Moody's said.

The decision, a day after Standard & Poor's confirmed its top rating on MBIA, removes a cloud over the company and the $673 billion of debt it guarantees. The prospect of bond insurers losing their top rating caused a seizure in the markets for everything from the safest municipal securities to bonds backed by home loans and credit card bills. A downgrade also threatened banks with losses of $70 billion on their asset-backed holdings, according to Oppenheimer & Co. analysts.

``It is a very positive thing that takes away the panic that has been out there for the last several months,'' said Andrew Harding, who helps manage $18 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland, in an interview with Bloomberg Television.

Fitch Ratings has the Armonk, New York-based company under review.

CDO Expansion

MBIA, down 77 percent in the past year, rose 70 cents, or 4.8 percent, to $15.28 in New York Stock Exchange composite trading. New York-based Ambac Financial Group Inc., down 87 percent in the past year, fell 22 cents to $12.19. Ambac, the second-largest bond insurer, is still under review from both S&P and Moody's.

MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers were criticized by ratings companies, lawmakers and regulators over their decision to expand into collateralized debt obligations that caused losses of more than $7 billion. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities.

Moody's said the decision to affirm the rating was in part because of MBIA's $2.6 billion in capital raising as well as yesterday's announcement that the company will stop guaranteeing structured finance securities for six months and wouldn't guarantee any securities using credit default swaps.

Dividend Eliminated

The initiatives, including elimination of the company's dividend, reduced rating company capital requirements by about $2 billion, MBIA Chief Executive Officer Jay Brown said during a CNBC interview.

MBIA won't lose ``a lot of money'' in the CDO business and the company's market capitalization will rise to about $10 billion from $3 billion in five years, Brown said.

As well as roiling credit markets, a credit rating cut would have stymied MBIA's ability to guarantee debt. Even now, sellers of municipal debt have avoided having their bonds guaranteed by MBIA. MBIA didn't sell any guarantees on municipal bonds issued during the first two weeks of February, according to preliminary data compiled by Thomson Financial and cited in a Merrill Lynch & Co. report distributed last week.

``For the time being, they're AAA at two of three agencies, and that's essentially all you need to be considered AAA,'' said Robert Haines, an analyst at CreditSights Inc., an independent bond research firm in New York. ``At least now, they are potentially in the mix of writing new municipal business. Probably no one would have even talked to them while they were on credit watch by both Moody's and S&P.''

Credit-Default Swaps

Credit-default swaps tied to MBIA's holding company dropped to the lowest since the start of the year as investors pared their bets of a downgrade. The contracts dropped 87 basis points to 615 basis points and have plunged 240 basis points the past two days, according to London-based CMA Datavision.

The contracts on Aa3 rated MBIA Inc., the parent company, trade at the same levels as junk-rated companies including home builder Lennar Corp. and Avis Budget Group Inc., according to CMA. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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 decline indicates improvement in the perception of credit quality; an increase, the opposite.

Mitigate Risk

Moody's chose to retain the ratings even though it said MBIA likely faces $4 billion in losses. The company's commitment to suspend its asset-backed guarantee business and tighten its underwriting standards means the risk is reduced, Moody's said.

``Moody's believes that MBIA's significant exposure to the mortgage sector is indicative of a risk posture somewhat greater than would be consistent with an Aaa rating going forward,'' Moody's analysts said in the report.

MBIA doesn't plan to sell more equity to raise capital, though other capital raising initiatives are possible, Brown told CNBC.

``This reaffirmation is a major step in our five-year transformation plan,'' Brown said today in a statement distributed by Business Wire.

Moody's said MBIA could lose as much as $13.7 billion under a worst-case scenario. That compares with claims-paying resources of $16.1 billion, Moody's said today. The loss probably will be closer to $4 billion, Moody's said.

``This doesn't mean we are out of the woods yet, but certainly things are looking better than they had been,'' said Dan Castro, chief credit officer of the structured finance business at GSC Group. in New York.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: February 26, 2008 17:21 EST