Jan. 30 (Bloomberg) -- Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital.

Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings.

The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business. FGIC, along with MBIA Inc. and Ambac Financial Group Inc., are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home- equity loans, as well as collateralized debt obligations.

``This announcement is based on FGIC's not yet raising new capital, or having executed other risk mitigation measures, to meet Fitch's AAA capital guidelines within a timeframe consistent with Fitch's expectations,'' the ratings company said today.

FGIC is controlled by Walnut Creek, California-based PMI Group Inc., Blackstone Group LP, and Cypress Group. PMI dropped 32 cents, or 3.4 percent, to $9.11 in New York Stock Exchange composite trading. Blackstone fell 34 cents to $18.65.

``We're examining our options,'' Blackstone spokesman Peter Rose said.

Subprime CDOs

The insurance unit's top rating was placed under review by Fitch, Moody's and S&P in December after downgrades of securities backed by subprime mortgages. Fitch gave the company until this week to boost capital by $1 billion.

About 71 percent of FGIC's guarantees are on municipal bonds, 23 percent are structured finance and 6 percent are international transactions, according to the company's Web site. FGIC guaranteed $21 billion of home-equity securities, $8.8 billion of subprime mortgage debt, and $10.3 billion of CDOs backed by subprime mortgages and other loans, the Web site shows.

The once unquestioned strength of AAA rated bond insurers is being reassessed on concern by Fitch, Moody's and S&P that they don't have enough capital to cover losses stemming from downgrades on securities they guarantee.

Blackstone Writedowns

Fitch this month cut Ambac to AA from AAA and sliced Security Capital Assurance Ltd. five levels to A.

CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities, have accounted for the biggest portion of the more than $133 billion in writedowns since the third quarter at the world's biggest banks.

Blackstone Group President Hamilton James said on Jan. 10 his company may write down its stake in FGIC after the collapse of the subprime-mortgage market.

``We have some realizations in the pipeline but also some writedowns we are facing such as FGIC,'' James said on a conference call to discuss the purchase of hedge-fund firm GSO Capital Partners LP.

Blackstone, based in New York, bought Financial Guaranty with PMI Group and Cypress Group from General Electric Co. for $1.9 billion in 2003.

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

Last Updated: January 30, 2008 17:47 EST