Sell Side

FSA Gets $300M Boost

Financial Security Assurance Holdings Ltd. yesterday received a boost from parent Dexia SA, when the Franco-Belgian bank agreed to inject $300 million in the company and take on responsibility for the "liquidity and credit risks" of FSA's financial products business, the company announced yesterday.

FSA also announced a shift in strategy, saying it will exit the asset-backed securities business that has plagued bond insurers to focus exclusively on public finance, which it feels represents high demand in a lower-risk market.

"The public sector's challenge of meeting the enormous needs for new public infrastructure and replacement of aging projects throughout the world in the current period of economic stress makes insured executions more cost-efficient for issuers and more attractive to a broader group of investors," FSA chairman and chief executive officer Robert Cochran said in a statement.

This marks the second time this year Dexia has added capital to FSA, with a $500 million infusion occurring in February. Dexia has also backed the financial products segment in the past, extending a $5 billion line of credit to the guaranteed investment contract unit in June.

FSA Holdings made the announcement along with its second-quarter earnings. It reported a net loss of $330.5 million for the second quarter, primarily because of impairment charges to its financial products investment portfolio and increased loss reserve expenses related to its exposure to residential-mortgage backed securities. Excluding fair-value adjustments, FSA reported an operating loss of $502.7 million for the second quarter.

The announcement received mixed reviews from rating agencies. Fitch Ratings affirmed FSA Holding's bond insurer subsidiary Financial Security Assurance Inc.'s AAA rating with a stable outlook based partly on Dexia's support, noting FSA would have fallen below triple-A capital thresholds without it. Standard & Poor's affirmed FSA's AAA rating, but revised its outlook to negative from stable, citing the possibility recent losses have "damaged" the FSA franchise.

Two weeks ago, Moody's Investors Service placed FSA Inc. on review for downgrade because of uncertainty about the demand for financial guaranty enhancement and risks within the bond insurer's portfolio. FSA has mostly avoided exposure to the collateralized debt obligations on asset-backed securities that have roiled other insurers, but still has significant exposure to the weakening RMBS sector.

For the second quarter, FSA Holdings's increases in reserves led to a $391.9 million after-tax loss, largely because of increased loss estimates on RMBS transactions. FSA attributed the added reserves to its concerns that it will take longer than expected for the performance on those transactions to recover.

In regards to its exit from the asset-backed securities business, FSA expects earned revenues to total more than $700 million following the run-off. It also expects to free up capital of more than $1 billion as risk expires. The remaining average life of its asset-backed residential mortgage-backed exposure is approximately 3.5 years, the company said.

"FSA exceeds the triple-A capital requirements for all three rating agencies, and we will continue to work closely with each of them to address the qualitative and systemic issues raised in recent reports," Cochran wrote in his quarterly letter. "Our RMBS reserves now anticipate a long and stressful economic environment, and therefore we expect these reserves to be largely sufficient over time. Equally important, our strategic realignment is expected to reduce our future financial statement volatility and significantly strengthen our capital position as our asset-backed exposures amortize."

FSA Inc.'s business has increased substantially as one of the three remaining triple-A insurers, wrapping $34.2 billion in bonds so far in 2008 through yesterday, compared to $27.4 billion at that point last year, according to Thomson Reuters data. The insurer has also benefited from reduced competition by upping premiums, with its net premiums written for the second quarter increasing to $267.4 million, a 204.2% jump from the same period last year.

Still, with the uncertainty in the market, Standard & Poor's had some concerns about FSA moving forward.

"Although first-half production results for FSA were very strong, in our view, FSA's aura as one of the better bond insurance underwriters may now be tarnished," Standard & Poor's credit analyst Robert Green said in a statement. "The economic losses and reserves announced today for the second quarter, combined with those taken in the first quarter, may cause issuers and investors to seek alternatives."


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