NEW YORK (Bloomberg) — Bermuda-based Security Capital Assurance Ltd.'s bond insurance units, hobbled by a decline in sub-prime mortgage securities, lost its Aaa credit rating at Moody's Investors Service.

XL Capital Assurance Inc. and XL Financial Assurance Ltd. were cut six levels to A3, New York-based Moody's said yesterday in a statement. The outlook for both is negative, Moody's said.

SCA was stripped of its top ranking at Fitch Ratings last month after the company decided against raising capital to offset losses on sub-prime securities it guarantees. The downgrades throw into doubt ratings on as much as $154.2 billion of debt.

"SCA is more weakly positioned than many of its peers with respect to business franchise, prospective profitability and financial flexibility," Moody's said in the statement. All securities guaranteed by the insurers will be downgraded to A3 unless they have higher underlying ratings, Moody's said. Credit-default swaps tied to XL Capital Assurance rose 50 basis points to 13 percent upfront and 500 basis points a year, according to Credit Derivatives Research LLC. That means it would cost $1.3 million upfront and $500,000 a year to protect $10 million of debt for five years.

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 worsening perceptions of credit quality; a decline, the opposite.

SCA's problems have impacted on XL Capital, which owns 46 percent of the bond insurer. XL lost $1 billion in the fourth quarter due to credit-market related charges, most of which were linked to its involvement in SCA.