Bond insurer Syncora Guarantee late Thursday announced it had executed a master transaction agreement with 25 financial counterparties that lets it commute or restructure all of its $56 billion in credit-default swap exposure.

The deal is a key part of Syncora's efforts to remedy its policyholders' deficit of nearly $2.4 billion and avoid regulatory takeover. The New York Insurance Department had issued an order April 10 giving Syncora until last Friday to take "steps as may be necessary" to meet minimum surplus requirements.

Syncora, which has suspended claims payments pursuant to the order, also needs a sufficient number of holders of RMBS it backed to accept tender offers for the securities. The deadline for tendering was 11:59 p.m. last Friday, but it had been extended several times.

A spokesman for the Insurance Department said restructuring the credit-default swaps was "significant progress." Regulators will evaluate the results of the tender offer within a few days, the spokesman said.

As of March 31, Syncora Guarantee would have had a $150 million policyholders' surplus if the deals had gone through by then, it said. The drop-down insurance company it is creating to provide cut-through reinsurance on public finance and global infrastructure credits, as well as insuring remaining CDS exposures, would have a policyholders' surplus of $292 million.
Syncora is to commute CDOs of ABS exposure with an aggregate par value of $15 billion and case base loss reserves of $4.6 billion. The commutations cover essentially all of its financial guaranty exposure to ABS CDOs.

Drop-down insurer Syncora Capital Assurance is to assume as a new guarantor the remaining $40 billion of CDS exposures, which have no loss reserves under statutory accounting principles. Syncora Guarantee will, "under limited circumstances," continue to insure some principal and interest claims of the CDS.

Under the deal's terms Syncora Guarantee is to give the counterparties $1.2 billion in cash, short-term surplus notes of $150 million, long-term surplus notes of $475 million, 40% of the common stock of parent Syncora Holdings and $50 million in additional considerations. Neither Syncora Guarantee nor Syncora Capital will be able to write new business, "except in very limited circumstances."

The deal has several closing conditions, including completion of the tender offers, regulatory approval, and fairness and solvency opinions.

If the deals are not closed and Syncora is placed into rehabilitation or liquidation, it could trigger mark-to-market termination payments on its CDS of more than $15 billion, which "would significantly exceed its ability to make such payments."

Syncora said management would reevaluate the "going-concern status" of Syncora Holdings and Syncora Guarantee once the transactions are completed.

"The future going-concern assessment of the management of Syncora Holdings and Syncora Guarantee will be based in large part on the reduction of ABS CDO and RMBS exposure and the mitigation of risk of adverse loss development pursuant to such agreements, its management's assessment of the risk of additional adverse loss development on remaining-in-force exposures, and Syncora Guarantee's compliance with its statutory minimum policyholders' surplus requirement," Syncora said.

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