S&P Downgrades MBIA, Ambac

Standard & Poor's on Thursday downgraded embattled bond insurers MBIA (MBI Quote) and Ambac (ABK Quote), a day after its main rival threatened the same.

Standard & Poor's, which is owned by McGraw Hill (MHP Quote) cut its financial strength rating on both companies to double-A from triple-A one day after Moody's (MCO Quote) said it could drop the insurers as low as single-A.

S&P also placed the both companies on a negative credit watch, signaling a likelihood of further downgrades in the future.

Since Fitch Ratings has already downgraded the bond insurers to double-A, S&P's announcement marks deep trouble for MBIA and Ambac.

Bond insurers depend on stellar credit ratings because they sell financial guarantees on securities to debt issuers in order to boost ratings on those securities. Investors say the bond insurance companies will have difficulties taking on new business without triple-A ratings.

In a statement, Ambac expressed disappointment in S&P's action and protested its "ever-changing criteria" for a Triple-A rating.

"Less than three months ago, S&P affirmed our [triple-A] rating and removed Ambac from Credit Watch Negative, citing our successful capital raise and moratorium on new structured finance business production," Ambac said in a statement. "At that time, Ambac had claims-paying ability greater than $700 million in excess of S&P's stated requirements. S&P stated [Thursday] that it is no longer basing our rating on claims-paying ability, but rather on the diminished flow of new public finance and structured finance business we are experiencing."

S&P cited a decline in new business along with financial weakness as a reason for its downgrades. Investors fear that both companies face a potentially crushing spike in claims if debt securities they insured that go into default.