By MICHAEL GORMLEY, AP Posted: 2008-02-15 17:23:37
ALBANY, N.Y. (AP) - New York regulators are eager to consider splitting Financial Guaranty Insurance Co.'s core bond insurance businesses to protect municipal credit ratings against costly downgrades and stem troubles in the debt markets.
In a statement Friday, FGIC said would like to organize a new domestic financial guarantee insurer in New York to "provide support for public finance obligations previously insured by FGIC."
Analysts said other bond insurers are likely to make similar moves to split their exposure to riskier financial instruments.
"Other bond insurers will be tempted to follow suit, especially the ones that have already been downgraded by at least one ratings agency," said Donald Light, a senior analyst at Celent of Boston, a financial research and consulting firm.
State Insurance Superintendent Eric Dinallo, who has spoken sympathetically about FGIC's need for a split of its municipal insurance business, said he hopes that won't happen to other mortgage insurers.
He said talks are going well with the other bond insurers, including MBIA Inc. and Ambac Financial Group Inc.
"There's a lot of interest and they're just going to have to figure out how to economically execute on it," he said. "But I think there's a much higher degree of optimism on those two companies."
Dinallo said rating agencies have given bond insurers a week or two to strike a deal.
Bond insurers have struggled in recent months as ratings agencies have worried the companies would not have enough capital to cover a potential spike in claims. Ratings agencies are worried rising delinquencies and defaults on mortgages will lead to an increase in defaults among bonds backed by the troubled loans.
That in turn would force insurers to pay out claims. Bond insurers pay principal and interest when issuers fail to make payments.
A ratings downgrade would make it more expensive for cities and towns to borrow money.
On Thursday, FGIC's critical financial strength rating was cut by Moody's to "A3" from "AAA." Bond insurers essentially need a "AAA" rating to book new business. Moody's said FGIC needs access to $9 billion to maintain the "AAA" rating, but the company currently has access to just $5 billion.
Standard and Poor's and Fitch Ratings had previously downgraded FGIC.
In its statement Friday, FGIC said it has been exploring various capital raising and other initiatives over the past several months.
"After careful consideration, the company has informed the New York state Insurance Department that it would like to begin the process of organizing a new domestic financial guarantee insurer in New York," the statement said.
"Once licensed, this new insurer would be used to provide support for public finance obligations previously insured by FGIC and to write new business to serve the municipal markets," the company said.
Dinallo said Friday that "without capital infusions this probably is the necessary outcome" for FGIC.
"That's sort of the endgame if we can't get capital infusions into these companies," he said.
Dinallo said word that FGIC may split its businesses stops the clock on any more downgrades. He said a decision on whether the split will be allowed will take weeks because of the complexity of creating the application and then reviewing it.
A day after he and other state officials testified at a congressional hearing on the bond insurers, Dinallo said the message from Congress was, "If you can solve it, solve it, but don't let the municipalities downgrade."
The insurance department has been working in recent months with bond insurers and banks to figure out ways to help the insurers maintain their "AAA" ratings and ensure their viability.
"I think it's just important that we demonstrate, or the company at least tries to demonstrate, there is a plan, that we have the capacity to save the ratings on the municipal side of the books," Dinallo said. "We want a private side solution that injects capital into these companies ... but failing that, we can't let the municipalities downgrade."
Associated Press Writer Michael Hill in Albany and Business Writer Stephen Bernard in New York City contributed to this report.
A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.
The money from banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.
Ambac is also considering raising equity from shareholders and it is not yet clear how much capital it will need, or what credit ratings the split businesses will have. Talks between Ambac and the banks will continue this weekend, with a view to finalising a deal by early next week.
The banks looking at supporting Ambac include Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.
Bond insurers have for decades guaranteed debt issued by municipal borrowers, lending them, in effect, triple-A credit ratings in exchange for a fee. Bond insurers, or monolines, have ventured into structured finance guarantees, including guarantees on complex debt instruments such as collateralised debt obligations. The subprime mortgage crisis has led to a jump in losses in this sector, threatening the triple-A credit ratings of Ambac and MBIA, the biggest monolines.
Municipal borrowers are being hit by the crisis of confidence in the insurers, whose guarantees back $2,400bn of bonds. With interest rates for some municipals rising sharply, regulators have called for a solution that will ensure the municipal business retains its triple-A rating.
Last month, banks were called in to meet Eric Dinallo, the New York insurance superintendent, who urged them to discuss possible action to prevent downgrades. Federal policymakers did not arm-twist banks to take part in a rescue. But a senior Treasury official said it had to “blow some smoke away” so market participants understood their “indirect interest”.
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