Jan. 23 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the biggest bond insurers, are likely to be bailed out to avert worsening credit-market turmoil, according to analysts at UniCredit SpA.

``A kind of bailout supported by monetary authorities or governments is the only chance for the industry to survive,'' Jochen Felsenheimer, the Munich-based head of credit derivatives research at UniCredit, Italy's biggest bank, wrote in a note to investors today. ``This bailout seems to be highly likely given the important role of bond insurers in the current market environment.''

Ambac was stripped of its top AAA grade by Fitch Ratings last week and Moody's Investors Service and Standard & Poor's are reviewing Ambac and MBIA for downgrade, throwing doubt on the $2.4 trillion of bonds the industry guarantees. New York's insurance department said yesterday it is drafting stronger regulations to stabilize the market for bond insurers that have been pummeled by losses on securities linked to subprime mortgages.

ACA Capital Holdings Inc.'s state regulator is holding off on delinquency proceedings because the bond insurer won more time from customers to unwind $60 billion of credit-default swap contracts it can't pay. New York-based ACA Capital, which had until last week to post $1.7 billion in collateral, has until Feb. 19 to arrange a longer-term solution, the Maryland Insurance Administration said yesterday.

Ratings Downgrades

Credit-rating downgrades may prompt forced sales by investors that are restricted to holding the highest-grade bonds, as well as further losses at banks that have already written down more than $130 billion on failed investments.

``Forced selling triggered by a downgrade of the monolines would lead to a further deterioration of an already distressed market,'' Felsenheimer wrote.

New York's Insurance Superintendent Eric Dinallo said his office is drafting new regulations that would ``redefine'' the future activities of bond insurers.

``The department is engaged with insurers, banks, financial advisers, credit-rating agencies, other regulators and government officials, and other stakeholders in examining and developing measures to help stabilize the market,'' according to a statement yesterday from Dinallo's office.

Credit-Default Swaps

Credit-default swaps on New York-based Ambac and MBIA, in Armonk, New York, indicate the companies have a more than 60 percent chance of defaulting. The contracts cost $1.9 million initially and $500,000 a year to protect $10 million of debt from default for five years, according to CMA Datavision.

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 rise indicates deterioration in the perception of credit quality; a decline, the opposite.

``Monoline meltdown would be a situation that would require intervention by the New York Fed,'' Toby Nangle, who oversees about $48 billion as head of global aggregate fixed income at Baring Investment Services Ltd., said in an interview Jan. 21.

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

Last Updated: January 23, 2008 11:27 EST