Bermuda-based Security Capital Assurance Ltd. was yesterday downgraded by Fitch Ratings from its all-important AAA financial strength rating — and that will severely damage the bond insurer's ability to write new business.

Fitch cut its rating five levels to A on SCA's XL Capital Assurance and XL Financial Assurance. The units, which guarantee municipal and corporate bonds, were given four to six weeks on December 21 by Fitch to raise about $2 billion of capital or lose their top ratings. Moody's Investors Service and Standard & Poor's are also reassessing their rankings.

SCA has been hit hard by its exposure to bonds linked to US sub-prime, or high-risk, mortgages.

Yesterday, SCA's shares fell $1.16, or 30.6 percent, to $2.63 at 10.50 a.m. in New York Stock Exchange trading. The shares rose above $33 in May.

The downgrade throws the rankings of at least $154.2 billion of securities insured by SCA into doubt.

It was the second downgrade of an AAA rated bond insurer by Fitch, which on January 18 lowered its rating on Ambac Financial Group Inc.'s bond insurance business two levels to AA. Both Ambac and SCA said they abandoned plans to raise new equity capital.

"The downgrades follow Security Capital's announcement yesterday that it has determined not to raise new capital at the present time due to current market conditions," Fitch said in a statement yesterday.

The loss of the AAA stamp jeopardises ratings on securities the SCA units insured, including 3,375 bonds issued by municipalities from New York to Bismarck, North Dakota. The downgrade may limit SCA's ability to generate new business.

About 38 percent of XL Capital Assurance's guarantees are municipal bonds, 46 percent are structured finance securities and 16 percent are international transactions. The unit guaranteed $16.1 billion of collateralised debt obligations backed by sub-prime mortgages which were performing worse than expected.

SCA, along with MBIA Inc., Ambac and FGIC Corp. is paying a price for expanding beyond its traditional municipal-bond businesses to guaranteeing debt linked to riskier sub-prime mortgages and home-equity loans. The once unquestioned strength of the bond insurers is being reassessed by Fitch, Moody's and S&P because the companies may not have enough capital to cover losses stemming from downgrades on securities they guarantee.