March 31 (Bloomberg) -- Moody's Investors Service cut FGIC Corp.'s insurance financial strength credit rating to one step above junk status because of the company's inability to raise new capital and the likelihood it will breach regulatory requirements.

Financial Guaranty Insurance Co. and FGIC U.K. Ltd. were cut three levels to Baa3 from A3, Moody's said in a statement today. Moody's also lowered its senior debt rating on the holding company to B3 from Ba1.

``The cushion above the required regulatory minimum may not be sufficient to absorb additional losses associated with FGIC's mortgage related exposures,'' Moody's analysts Arlene Isaacs-Lowe and Jack Dorer in New York said in a statement today.

Bond insurers are struggling to hold on to their ratings as rising losses from mortgage-linked debt erode capital. New York- based FGIC, which has stopped writing new business, had its financial strength rating slashed six levels to junk last week by Standard & Poor's. High-yield, or junk, bonds are those rated below Baa3 by Moody's and lower than BBB- by S&P.

Moody's will keep FGIC under review ``to reflect the heightened risk of FGIC breaching minimum regulatory capital requirements, and the uncertain consequences for policyholders and creditors of possible regulatory intervention,'' the analysts wrote. FGIC earlier this month reported a $1.89 billion fourth- quarter net loss.

Plan of Action

FGIC said in a statement last week that it needs to file a plan of action to the New York state insurance department because the amount of total risk has exceeded a regulatory limit. The company's capital surplus is about $195 million above statutory requirements, according to numbers released by the company.

According to FGIC, before New York would take over the insurer, the company would need to suffer more losses; have both its statutory capital and insured exposure levels violate limits; be unable to raise more capital; and have New York State Insurance Department Superintendent Eric Dinallo decide on a seizure.

``They're not out of the woods yet,'' Dinallo said in a Bloomberg television interview today. ``We have a plan that we've given the company about how to search for capital and then how to resolve where they're going to eventually end up.''

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: March 31, 2008 17:31 EDT