The first quarter of 2008 brought a slew of grim announcements for the financial guarantor industry, including a decision by some to put new business on hold altogether. But despite market troubles, the monolines held on in the beginning of 2008, even if only by a thread.
In the first quarter, both Ambac Financial Group and MBIA declared a six-month moratorium on insuring any new structured finance business, while FGIC and XL Capital Assurance (XLCA) said they would no longer be writing any new business for an undisclosed period of time. Spokespeople for FGIC and XLCA were not able to provide additional details on the time frame of the suspension or whether certain lines of the business were to be abandoned altogether.
Calls to MBIA were referred to a February statement from Jay Brown, chairman and chief executive officer, which noted that the company will be suspending the structured finance business "in order to both increase capital safety margins and allow us to evaluate and revise our credit appetite for the future."
Ambac said it would discontinue wrapping certain structured finance businesses, including CDOs; CLOs; whole business securitizations; credit card, auto and emerging market transactions. The company also said it would stop using credit enhancement transactions in the credit default swap format and discontinue writing new financial services business.
A spokesperson for the company was not able to comment about future business plans for the monoline, given the uncertainty of the current economic outlook.
Because of the lack of appetite for new business, the monolines cut jobs.
Most recently, Security Capital Assurance (SCA), the parent company for XLCA, laid off 60 members of its insurance business origination group. Ambac also laid off 25 people last month as part of its efforts to restructure and exit certain lines of business (ASR, 03/24/08).
Even the top level executives of the guarantors' structured finance groups were not immune. For instance, Andrew Dym, managing director and head of the structured finance and capital markets group at CIFG, and Tom Adams, managing director at FGIC, left their firms over the quarter.
Rising Above the Rubble
But not all guarantors are slashing staff and halting new business. It's a case of one bond insurer's loss is another one's gain.
Assured Guaranty Corp. announced last week that it had expanded its U.S. public finance group during 1Q08 as a result of increasing demand for the company's financial guaranties in this area.
"We are experiencing a huge demand for our [public finance] product," said Michael Schozer, president of Assured Guaranty.
The company once had a smaller public finance business than some of its competitors, but it has now grown larger. Assured took approximately 30% market share in 1Q08.
Recent hires to the public finance group include Mary Francoeur, who has joined as the managing director for a newly formed infrastructure and project finance team; Joseph Chu, as a director focusing on regulated investor-owned utilities and public power issuers; and Michael Bartsch, as a director on the general government team. The company also said it expects to expand the U.S. public finance group by at least four professionals to reach a total of 23 or more professionals by midyear 2008.
Assured was also somewhat active in emerging markets, closing a wrap on March 5 for a six-year, $250 million transaction from Banco do Brasil that collateralized payment rights (ASR, 3/31/08). Pricing was at Libor plus 55 basis points.
The guarantor will continue to wrap emerging market deals if the opportunity is attractive and at an appropriate price, Schozer said, noting that spreads have widened out much slower in emerging markets.
Both FSA and Assured Guaranty remain the only financial guarantors rated triple-A, with a stable outlook, by all three rating agencies (see chart below).
Sean McCarthy, president and chief operating officer at FSA, noted that though market liquidity has limited the number of transactions, the company continues to focus on "high-quality, well-structured and attractively priced business."
In the current market, FSA has "generally raised the bar on the underlying shadow rating of a transaction, but that requirement remains a case-by-case determination," McCarthy said.
Like Assured, FSA is also focusing on the public finance side. "Our municipal business is extremely robust. Our priority remains to provide strong triple-A value to the market," McCarthy said.
Getting by With a Little Help
On the flip side, FGIC has come under fire to raise additional capital. The bond insurer announced that it was in discussions last week with potential investors and other parties regarding strategic alternatives, and it hired Goldman Sachs to assist in this effort.
Although there are no definitive solutions on the table, potential plans could range from raising capital through a bulk reinsurance transaction or a sale of all or part of the business, FGIC said in a statement.
Similarly, on March 3, SCA announced that it had also retained Goldman Sachs as a financial advisor to assist the company in evaluating strategic alternatives, including raising new capital, structuring reinsurance solutions and negotiating the commutation or restructuring of certain financial guarantee obligations.
While fund-raising may be tricky given the current market conditions, Thomas Abruzzo, managing director and lead monoline analyst at Fitch Ratings, pointed out that other guarantors have been able to raise capital, which has helped their positions and prevented further downgrades.
Assured Guaranty recently announced the completion of a common stock purchase by WL Ross & Co., resulting in $250 million in proceeds for the company and giving WL Ross a 12% stake. The company can also elect to receive another $750 million from WL Ross until April 8, 2009. Assured's Schozer noted that the company would either buy back shares or issue common equity given its capital needs and current market conditions.
Also during 1Q08, Ambac announced the close of common stock and equity unit offerings, which raised an aggregate of $1.5 billion for the company. Meanwhile, MBIA completed a $1 billion stock offering in 1Q08, and Dexia, the parent company of FSA, infused $500 million into the monoline.
Support for the guarantors, FGIC in particular, will also come by way of the New York State Insurance Department (see story, p. 3). "As a regulator, they are obviously concerned with any insurance company's health and solvency," Abruzzo said. "But they are also concerned about future availability of the financial guaranty product. You really need to have triple-A ratings to be an effective provider, at least from a market perspective."
Other monolines are struggling with ratings troubles as well. Both CIFG - whose insurer financial strength rating was downgraded to A-' with a negative outlook from AA-'- and MBIA requested that their ratings be withdrawn by Fitch. Later, Fitch downgraded MBIA's insurer financial strength rating to AA' from AAA' and gave it a negative outlook.
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