May 14 (Bloomberg) -- Moody's Investors Service said deepening losses at MBIA Inc. and Ambac Financial Group Inc. may imperil their Aaa credit ratings less than three months after affirming the top grade.

The two largest bond insurers recorded a total $6.7 billion of first-quarter charges for losses on home-equity loans and collateralized debt obligations, ``elevating existing concerns about capitalization levels relative to the Aaa benchmark,'' Moody's said yesterday in a report.

The prospect of downgrades earlier this year for Armonk, New York-based MBIA and Ambac in New York roiled world capital markets on concern that their guarantees for more than $1 trillion of debt may be worthless. Now, Moody's analyst Jack Dorer says he will examine whether the writedowns and a dimming outlook for mortgage debt are ``likely to be material for exposed financial guarantors.''

``This could be a signal that they're going to put them back under review,'' said Robert Haines, an analyst with CreditSights Inc., a bond research firm in New York. ``If they're put under review, they'll be back for capital.''

Moody's and Standard & Poor's placed MBIA and Ambac on review for downgrades in January. Moody's affirmed the Aaa ratings on the insurance units of MBIA in February and Ambac in March after the companies sold a combined $4.1 billion in shares, bonds and convertible debt to help cushion against losses. Moody's has a negative outlook on both. S&P yesterday said it will take no action on MBIA.

Derivatives Charges

MBIA cited differences with Moody's assumptions in a statement today.

``We are not aware of any changes to capital requirements for our deals nor do we believe any is warranted based on deal performance or expected losses,'' MBIA said. There are ``significant differences'' between the subprime home equity loan pools referenced in the Moody's report and the deals MBIA has backed, the company said.

MBIA reported a $2.4 billion quarterly loss on May 12, its third in a row, after $3.58 billion of charges on derivatives used to guarantee CDOs and other debt. Chief Executive Officer Jay Brown told investors on a conference call the company may be able to obtain a stable outlook for its ratings by year end.

`Very Comfortable'

Brown earlier this month told shareholders at the company's annual meeting that he was ``very comfortable'' that MBIA had raised enough capital.

Ambac has ``no material exposure'' to subprime borrowers in securities composed of home-equity lines of credit, the company said in a statement today.

Ambac posted a loss last month of $1.66 billion for the first quarter, also its third in a row, after charges of $3.1 billion related to mortgage securities. CEO Michael Callen said in an interview April 25 that the ratings were ``solid'' and the company had no need for capital.

MBIA, down 87 percent in the past year, fell 2 cents, or 0.2 percent, to $9.30 in New York Stock Exchange composite trading. Ambac fell 10 cents, or 2.5 percent, to $3.90. Ambac slumped 96 percent in 12 months.

The cost to protect $10 million of debt of MBIA's insurance unit for five years jumped $25,000 to $775,000, according to Phoenix Partners Group. Credit-default swap sellers are demanding $815,000 to protect $10 million of debt guaranteed by the insurance unit at Ambac, up from $765,000.

Debt Protection

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.

While Moody's stopped short of placing the companies on formal review, it said it's concerned that losses on bonds backed by second-lien loans, or second mortgages, are rising at a faster pace than anticipated. MBIA and Ambac have ``significant exposure'' to that debt, Moody's said in the report.

Financial Security Assurance Holdings Ltd., one of only two bond insurers that's held on to the stable outlooks on all three of its AAA credit ratings, reported losses on home-equity loans earlier today.

FSA, owned by Paris and Brussels-based Dexia SA, said it was increasing loss reserves by $355 million for home equity lines of credit and closed-end second liens.

The New York-based company insured about 64 percent of new municipal bond issued in the first quarter, up from its previous market share of about 25 percent, FSA said.

Home-Equity Loans

Moody's, S&P and Bank of America Corp. all raised concerns about home-equity loans. S&P this month said it will stop rating new bonds backed by the loans. Bank of America, the nation's biggest consumer bank, yesterday said losses on $118 billion of home-equity loans will be worse than predicted three weeks ago, possibly exceeding 2.5 percent.

Ambac set aside $1 billion during the quarter to cover second-lien mortgage claims. Ambac said it insured $16.4 billion of bonds backed by closed-end second and home-equity lines of credit.

MBIA boosted forecast payouts on bonds backed by home equity loans by $495 million. MBIA said it insured $21 billion of bonds backed by home equity lines of credit and closed-end second loans at the end of 2007. Almost $9 billion were originated in 2007.

Goldman Sachs Group Inc. analyst James Fotheringham predicted last month the companies need to raise $3.4 billion each.

``More than likely, the rating agencies are preparing us for more capital raising activities,'' said Jim Ryan an analyst with research firm Morningstar Inc. in Chicago.

Fitch Ratings cut both to AA earlier this year and said MBIA needed about $3.8 billion more in capital to justify a AAA rating.

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

Last Updated: May 14, 2008 16:14 EDT