NEW YORK (Bloomberg) — Bermuda-based Assured Guaranty Ltd., the largest bond insurer by new guarantees, said Moody's Investors Service's review of its insurance grade for downgrade is inappropriate and may make it harder for cities and states to sell debt.

The ratings firm yesterday said it may lower rankings for Assured and Financial Security Assurance Inc., which last year were the last two bond insurers to be stripped of top credit grades. Assured, which is now ranked Aa2, may be cut because of possible losses on mortgage bonds and "pooled corporate exposures", Moody's said.

The reviews reflect the New York-based ratings company revising its assumptions for the potential direction of the economy and housing market to "a level significantly more stressful than that used" in the US government's so-called stress tests of the largest banks, Assured chief executive officer Dominic Frederico said in a statement yesterday.

"Moody's review of our insurance financial strength ratings may lead to near-term uncertainty and volatility in the markets that we serve — particularly in the municipal market, where we are effectively the only major active financial guarantor," he said.

Assured plans to buy FSA from Dexia SA, which is based in France and Belgium. Billionaire Wilbur Ross's WL Ross & Co., which agreed in February 2008 to invest as much as $1 billion in Assured, has promised "back-up" financing if the company finds it too expensive to raise equity from other investors to acquire FSA. His firm is Assured's second-largest shareholder, with a 13 percent stake, according to data compiled by Bloomberg.

Assured, which has fallen 44 percent over the past year, declined $1.02 cents, or 7.5 percent, to 12.61 in New York Stock Exchange composite trading yesterday.

The National League of Cities said May 18 it would ask the US Treasury for a $5 billion interest-free loan to capitalise a mutually owned municipal bond insurer, to replace capacity lost after most debt insurers' declining credit quality shut them out of the market.

Last year, municipal borrowers used insurance on 18 percent of bonds they sold, down from 47 percent in 2007, according to data compiled by Thomson Reuters. As the insurers' ratings collapsed, cities and states saw the value of their borrowing drop and banks that had purchased the guarantors' protection were forced to take write-downs.

Assured and FSA, which Moody's stripped of Aaa grades in November and which Fitch Inc. lowered this month, provided 96 percent of the new municipal guarantees last quarter, as the insured share of the market fell to 13 percent.

"As called for by Securities and Exchange Commission and as discussed in recent Congressional hearings, we request that Moody's make their review process fully transparent by disclosing completely all of their assumptions and the impact of these assumptions on their stress loss conclusions in the aggregate and on a transaction by transaction basis," Mr. Frederico said in the statement.