Sept. 24 (Bloomberg) -- FGIC Corp.'s credit rating was cut three grades to CCC from B by Standard & Poor's, which cited the company's inability to take dividends out of its bond insurance unit, Financial Guaranty Insurance Co.

FGIC's counterparty and senior unsecured notes rating also was assigned a negative outlook, S&P said today in a statement. FGIC's insurance unit may also be downgraded if a series of transactions aimed at boosting its regulatory capital aren't completed as scheduled, S&P said.

``We believe FGIC's capital position is fragile,'' S&P said in the statement.

The downgrade comes as FGIC, owned by Blackstone Group LP and PMI Group Inc., awaits regulatory approval of a transaction that would boost its statutory capital surplus and prevent a regulatory takeover. MBIA Inc. agreed Aug. 27 to reinsure $184 billion of FGIC-backed municipal bonds and Credit Agricole SA's Calyon unit said it would terminate a $1.9 billion insurance contract on mortgage-related collateralized debt obligations.

The two transactions were expected to free up enough capital so that regulators wouldn't have to take over FGIC, New York Insurance Superintendent Eric Dinallo said in August.

S&P said today that FGIC's regulatory capital cushion may deteriorate further. The ratings company cited loss estimates on securities backed by subprime mortgages ``which are a multiple of FGIC's current loss reserves.'' Also, FGIC's guarantee on a $1.2 billion guarantee of securities issued by Jefferson County, Alabama, which is considering filing for bankruptcy protection, may put stress on the company's regulatory capital, S&P said.

Preventing A Takeover

The MBIA reinsurance transaction may provide short term regulatory relief, though it won't necessarily improve FGIC's financial strength, S&P said.

``While the ultimate economic benefit of transferring about $900 million of future earned premium on this well-performing book of business is questionable in our view, management's near- term objective is to bolster statutory surplus to avoid regulatory intervention,'' S&P said.

If the transaction is not completed on schedule at the end of the month, FGIC's bond insurance unit may be downgraded as it could breach its minimum regulatory capital threshold, S&P said. The insurance unit is rated BB.

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

Last Updated: September 24, 2008 17:55 EDT