The mortgage insurance company MGIC Investment Corp. filed a federal law suit Monday against Radian Group, calling for Radian to turn over information that MGIC says it needs to decide whether or not to go through with the firms' planned merger.
MGIC accuses Radian of using a "strategy of delay," while Radian says it never agreed to provide the information on such a tight timeframe.
The two companies announced in February that they planned to merge, but MGIC said on Aug. 7 that it had considered pulling out of the deal because of the troubled mortgage market and a struggling joint venture between the two companies
In the complaint it filed with U.S. District Court in Milwaukee, MGIC said it based the decision to merge with Radian partly on evaluations that Goldman Sachs, its adviser on the deal, made back in February. Since then, the mortgage market, along with the outlooks for the firms' business lines, has changed drastically.
MGIC points out in the complaint that just two days after the merger was announced, HSBC Holdings announced that it would significantly increase its bad debt provisions because of an increase in defaults among mortgages extended to borrowers with bad credit. HSBC's disclosure was widely considered one of the opening salvos in what would become a bombardment of news about the souring subprime mortgage market.
By the end of July, MGIC and Radian realized that the market downturn had severely damaged the business of C-BASS, a joint venture of the two companies that issues, services, and invests in credit-sensitive residential mortgage assets. C-BASS had been inundated with margin calls from its investors.
On July 31, both firms announced that they would take impairments on their respective C-Bass investments. Though it is still not known how large these impairments will be, the companies said it could be as high as their entire combined investments -- about $1.03 billion.
Analysts and investors began to speculate that the merger would be spiked.
"Amid this flurry of speculation about the merger, MGIC began gathering available data to assess the impact of the C-Bass implosion, as well as its rights and responsibilities under the merger agreement," MGIC said in the complaint.
While MGIC did not publicly announce it was second-guessing the merger until Aug. 7, the company's chairman and chief executive officer, Curt Culver, told Radian management on Aug. 2 that the C-BASS impairment might be enough to call off the merger. Radian CEO S.A. Ibrahim replied that his company would be happy to supply any additional information "in short order," according court documents.
MGIC says it requested information from Radian several times during the following weeks but has not yet received the data. Requests related to Radian's net interest margin securities, its rescission of mortgage policies, its second-mortgage business, its financial forecasts, its financial guaranty business, and the materials that it has given to the rating agencies still are outstanding, according to court documents.
"From its own experience, MGIC knows that much of the requested information, such as forecasts and materials previously provided to rating agencies, exists in a readily available form," MGIC said in the complaint.
MGIC last week had suggested it might make a decision on whether or not to follow through with the merger, but no news came until the lawsuit was announced this morning. MGIC said that it was filing the lawsuit because it did not receive the information it wanted from Radian quickly enough.
"The board would not be asked to decide until MGIC's management had completed its analysis," MGIC said in a press release yesterday, adding that, "MGIC was requesting information from Radian in connection with that analysis."
For its part, Radian said in a press release yesterday morning that it has been providing MGIC with information, but that it "never consented" to MGIC's implied timeline.
Radian added that it "is compelled to carefully assess the proprietary nature of the subsequent information requests to ensure that Radian does not provide MGIC with an unfair competitive advantage in the event that MGIC decides that it does not have an obligation to complete the merger."
Radian has said it still believes MGIC is required to close on the merger. Company spokesman John DeLuca said Radian executives would not comment further yesterday because the ongoing litigation limits what they can say.
Radian also drew down $200 million of a $400 million unsecured revolving credit facility last Wednesday, according to documents filed with the Securities and Exchange Commission. The company said that it did not have an immediate need for the money but that it would give Radian "greater financial flexibility and liquidity for the long-term."
MGIC filed its lawsuit in Milwaukee where the company is based. The case has been assigned to Judge Lynn Adelman.
Foley & Lardner will represent MGIC, while Radian has chosen Wachtell, Lipton, Rosen & Katz as its counsel in the case.
In the municipal market, the merger battle creates worries that the double-A ratings on Philadelphia-based Radian's bond insurance subsidiary, Radian Asset Assurance, might be at risk. This would mean the bonds Radian insures could also be in danger of a downgrade.
Fitch Ratings, Moody's Investors Service, and Standard & Poor's have said the Radian parent's credit rating, along with those of subsidiaries, could drop if the deal with MGIC does not go through.
While Moody's and Standard & Poor's have upheld their stable ratings on Radian Asset Assurance, Fitch rattled the municipal market at the beginning of August when it put the bond insurer's AA rating on negative watch, along with 934 Radian-backed credits.
"Obviously, we think there is a high probability, based on statements from both companies and their actions, that this merger might not go through," said Tom Abruzzo, managing director at Fitch, in an interview yesterday. "You've seen what our actions will be." Fitch has said it will downgrade the Radian parent company and all of its subsidiaries at least one notch if the merger is cancelled.
Standard & Poor's affirmed its stable, 'AA' financial strength rating for Radian Asset Assurance in early August, but put a negative watch on many of the company's other ratings. The rating agency said it might downgrade the parent company by as many as two notches if the merger fails.
Such a downgrade could indirectly create problems for the bond insurer, too, because the rating agency does not like to have too great of a separation between the ratings of a parent company and its subsidiaries, Standard & Poor's said at the time.
Radian Group said in its second-quarter earnings release that it backed $17.1 billion of direct public finance debt as of June 30.
