Syncora Holdings  said yesterday its discussions with banks to commute $52.9 billion in credit default swap exposures highlight its second phase of restructuring, its "primary objective" in the near term.

Syncora will focus on capital preservation, risk reduction, and expense management during this part of its restructuring, as well as protecting municipal policyholders, said Susan Comparato, Syncora's general counsel, during an earnings conference call yesterday.

"I think really the restructuring effort with the bank counterparties is the primary effort here," said Comparato, who will become acting chief executive officer and president when Paul Giordano officially steps down from those positions Friday.

Syncora Holdings said 22 counterparties currently hold $59.4 billion in exposure to its bond insurer subsidiary Syncora Guarantee through credit default swaps. Syncora has set aside $820 million plus 46% of its own stock for possible settlements with 17 of those counterparties — representing $52.9 billion in exposure. The company has until Oct. 15 to reach deals with those 17 counterparties.

The deals to reduce these exposures have become critical to Syncora's ability to go forward. Syncora Guaranty staved off insolvency just weeks ago, when Syncora Holdings — formerly Security Capital Assurance  — signed agreements with former parent XL Capital Ltd. and Merrill Lynch & Co.

Under one agreement, Syncora Holding's subsidiaries received $1.775 billion plus stock from XL Capital in return for the termination of certain guarantees. In a separate deal, Syncora paid Merrill Lynch $500 million to commute eight credit default swaps with exposures totaling $3.74 billion.

As of June 30, Syncora Guarantee reported a policyholders' deficit of $881.1 million. This would have been a $1 billion surplus had the deals with XL Capital and Merrill been factored in, the company said.

Those deals give Syncora Guarantee the capital needed for a rating of between triple-B and A, Syncora Holdings chief financial officer Elizabeth Keys said during the conference call yesterday.

Standard & Poor's currently rates Syncora BBB-minus on negative watch. Fitch Ratings - which rates it CCC - and Moody's Investors Service — which rates it B2 — have both said they will review the company for possible upgrade.

Syncora said in a statement that despite the "favorable impact" of the deals with XL Capital and Merrill Lynch, "there is substantial doubt about its ability to continue as a going concern." The company said accounting rules prohibit it from considering potential deals when reaching this conclusion.

The company Monday reported a net loss of $492.9 million for the second quarter, thanks to losses and loss adjustments of $455.6 million. Like many other bond insurers, Syncora suffered from its direct residential mortgage-backed securities exposure, with net loss and loss provisions of $476 million on those transactions in the second quarter.

Syncora reported an operating loss of $1.288 billion in the second quarter, compared to an operating income of $46.4 million in the same quarter last year.

Shares of Syncora stock fell 29.17% yesterday to $1.70 at close. The stock traded as high as $24.06 a year ago.

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