Dexia Extends $5B Line of Credit to GIC Unit

SAN FRANCISCO DexiaSA, the Franco-Belgian bank that owns bond insurer Financial Security Assurance Inc., yesterday gave a $5 billion line of credit to a unit that issues guaranteed investment contracts, in a move to demonstrate its determination to maintain the unit's liquidity.

"This business has ample liquidity to meet its obligations, but, within a context of highly nervous financial markets, we want to remove any doubt that we will have the resources to hold investment assets to maturity," Robert P. Cochran, chief executive officer of FSA Holdings, said in a release.

Dexia's Financial Security Assurance Holdings Ltd. owns both FSA Inc., the bond insurer, and a financial products group that issues GICs. The bond insurer has maintained its triple-A ratings from all three major credit agencies because it avoided insuring mortgage-backed securities during the housing boom. That's allowed it to jump to the top rank among bond insurers this year, and Dexia gave the insurance unit an extra $500 million to pursue new business in February.

The financial products group the unprofitable unit that issues GICs is exposed to the mortgage market in two ways: it owes money to mortgage lenders via guaranteed investment contracts, and it holds investments in residential mortgage-backed securities that back its GICs.

Municipalities and other borrowers buy GICs to invest debt-service reserve funds and unspent bond proceeds. GIC providers like FSA's financial products group invest the funds in highly rated variable-rate securities and guarantee repayment to GIC investors.

As of May 31, FSA had $18.83 billion of GIC assets and $18.65 billion of GIC liabilities. Of the assets, 72% were invested in various mortgage-backed securities, including $7.9 billion of first-lien subprime mortgage securities.

FSA continues to believe those investments will be repaid, but their market values have decreased since the subprime market blew up, leading to speculation that FSA would have trouble meeting its GIC obligations if it faced a rash of unanticipated withdrawals or another drop in the value of its RMBS investments. It could also face increased collateral requirements if FSA were downgraded to the single-A level.

Hedge fund manager William Ackman of Pershing Square Capital Management in New York last week said he was betting against FSA at the Wall Street Journal's Deals and Deal Makers Conference. He previously made successful bets against MBIAInc. and Ambac Financial GroupInc.

Dexia gave the financial products group a $5 billion line of credit to allay those worries.

"We are committed to taking any and all necessary measures to ensure that FSA's ratings and leadership position in public finance are maintained," Dexia chief executive officer Axel Miller said in a statement. The bank wants to use its "easy and ample access to liquidity, to confirm to clients and investors that we are in for the long haul, even if such steps are not necessary from a strict liquidity point of view."

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