Standard and Poor's cut the credit ratings of MBIA and Ambac on Thursday, just one day after fellow ratings agency Moody's said it may do the same.

MBIA and Ambac are the two largest bond insurers and the loss of their top rating is a brutal blow to the companies. The two U.S.-based guarantors were founded to insure municipal bonds but became heavily involved in insuring mortgage debt.

"The rating actions on the companies reflect our belief that these entities will face diminished public finance and structured finance new business flow and declining financial flexibility," S&P said.

S&P also placed both companies on 'credit watch negative', suggesting the possibility of further downgrades. S&P said the resolution of the 'credit watch negative' designation will depend on "clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments."

By Adam Button and edited by Nancy Girgis