Moody's Investors Service announced today that the Aaa financial strength rating of Bermuda-based Channel Reinsurance Ltd., which provides coverage for troubled bond insurer MBIA, is on review for downgrade.

At the same time, Moody's also placed on review for downgrade the Aa3 rating assigned to contingent capital securities issued by Two Rock Pass Through Trust, a related financing trust, which provides backup for Channel Re.

Moody's said financial guaranty reinsurer has reinsured a broad range of risks from Armonk, N.Y.-based MBIA, including recent vintage second-lien mortgage securitizations, as well as significant amounts of asset backed securities (ABS) and collateralized debt obligations (CDOs) containing such exposures.

The rating firm said today's actions were motivated by growing concern about the possible effect of mortgage-related risks on Channel Re's credit profile in light of the prospect for worsening performance in the mortgage market and the inherent volatility in residential mortgage backed securities (RMBS) and ABS CDO exposures.

In a statement, Ranjini Venkatesan, a Moody's analyst said, "As part of its review, Moody's will evaluate the possible impact of this exposure on Channel Re's risk-adjusted capital adequacy and franchise value.

"We will also assess possible changes in the value that Channel Re provides to MBIA as a result of both companies' evolving credit and franchise profiles in the rapidly changing financial guaranty markets."

Moody's additionally noted that Channel Re's credit profile also has implications for the credit profile of MBIA, with strain at Channel Re placing incremental pressure on MBIA's capital adequacy, and will be a consideration in the ongoing review of MBIA's ratings.

MBIA's Aaa ratings were placed on review for downgrade on Thursday by Moody's. Fitch has maintained the MBIA ratings.