Moody's Investors Service has placed the 'Baa1' senior debt rating of XL Capital and the 'A1' IFS ratings of XL's insurance operating subsidiaries on review for possible downgrade after XL acted to increase capital, according to today’s Moody’s release.

XL said yesterday it has entered an agreement with Security Capital Assurance (SCA) to terminate all outstanding contracts including the excess of loss and facultative reinsurance agreements between the two for $1.775 billion in cash, the issuance of 8 million shares of XL common stock and the transfer of XL's 46% stake in SCA to a trust for the exclusive benefit of XLCA and XLFA. 

As a result, XL has no further liability under the guarantee of the pre IPO quota share reinsurance agreement between XLCA and XLFA. Certain credit default swap counterparties with SCA also signed the agreement and provided releases to XL and SCA.

Moody’s said that in conjunction with the agreement, XL announced its plans to raise approximately $2.5 billion of capital in the form of common stock (expected to be between $1.75 and $2 billion) and hybrid securities (expected to be between $500 and $750 million) due 2021 in order to bolster its capital. XL said that the capital will be used to fund the agreement with SCA, to support XL's property and casualty operating companies, to fund the early redemption of $255 million of senior debt and for general corporate purposes. 


XL said it intends to explore strategic opportunities related to its life reinsurance operations, exercise its contingent capital facility- Mangrove Bay- and cut its common stock dividend by about half per share in order to simplify its organizational structure and improve capital flexibility.

The 'Baa1' rating and possible downgrade review refers to the proposed offering of hybrid securities, which are designed to receive significant equity treatment for financial leverage calculations.

Moody's views the agreement with SCA and the proposed capital actions as credit positives as it eliminates a material uncertainty for XL, and said that the review for possible downgrade reflects the near term execution risk associated with the equity and hybrid security offerings given the size of the capital raise relative to XL's current market capitalization.


If XL completes the equity and hybrid capital raise as planned, then Moody's would likely confirm the ratings; if not XL's ratings are likely to be downgraded, possibly more than one notch. The review process should be completed shortly after the proposed capital raise is completed or fails to be completed.

In related news, XL Capital is changing its name to Syncora Guarantee.

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