Assured Guaranty expects to close its acquisition of Financial Security Assurance Holdings (FSA) on July 1, Assured and FSA parent Dexia announced yesterday.

The primary closing conditions, including "rating agency review and agreement on key transaction documents," have been met, the companies said. The deal, which excludes FSA's troubled financial products unit, will put the municipal market's two most active remaining bond insurers under one roof.

Assured will pay Dexia $361 million in cash and up to 44,567,000 common shares of Assured and has the option to reduce the number of shares by half with cash at a price of $8.10 per share. To finance the cash portion, Assured expects to use the proceeds of a public offering of securities.

Assured closed the day down 1.92% to 15.32%. The stock is up from the 52-week low of $2.69 per share it reached March 4.

Financial Security Assurance president Sean McCarthy earlier this week said the deal "will provide a compelling value proposition to the markets we serve."

Both FSA and Assured will continue to keep their insurance licenses and write new business, with FSA limiting itself to only to new public finance guarantees, McCarthy said at the Securities Industry and Financial Markets Association's Municipal Bond Summit.

Both FSA and Assured are committed to earning the highest ratings possible, McCarthy said. Moody's Investors Service — which downgraded both from triple-A last November — last month put Assured's Aa2 rating and FSA's Aa3 rating on review for downgrade.

Standard & Poor's rates Assured 'AAA' with a stable outlook and FSA 'AAA' with a negative outlook. Fitch Ratings rates Assured 'AA' with an evolving outlook and FSA 'AA'-plus on negative watch.

Although penetration rates have fallen as insurers have been downgraded, McCarthy said he sees a role for bond insurers moving forward. He said the product provides benefit beyond just protection from default, such as enhancing liquidity and providing added credit surveillance.
McCarthy also pointed to what he considers positive developments for the bond insurers, such as the decline in the use of letters of credit and the reinsurance legislation introduced by Rep. Barney Frank, D-Mass., in the House Financial Services Committee. McCarthy expects other forms of credit enhancement will emerge as well.

"When the dust settles, issuers will use bond insurance to lower borrowing costs by working through financial guarantors to improve their credit profile and broaden access to the market," McCarthy said.

Assured Guaranty has insured 779 issues with a par value of $16.5 billion this year, according to Thomson Reuters. In 2008, it backed 1,002 issues with a par value of $26.5 billion.

FSA has insured 266 bonds with a par value of $2.6 billion in 2009. Last year, it insured 1,417 issues with a par value of $39.2 billion

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