Sell Side

New Consortium to Bail Out Bond Insurer

Against the backdrop of downgrades among the financial guarantors, a group of eight banks has formed a group to bail out one of the bond insurers, and people familiar with the matter say a second and perhaps third group of banks is looking at solutions for other monolines.

It’s been reported that the consortium — made up of Citigroup Inc., UBS, Wachovia Corp., Barclays PLC, Royal Bank of Scotland Group PLC, Societe Generale, BNP Paribas, and Dresdner Bank AG — was looking to bail out Ambac Financial Group Inc., parent of ailing bond insurer Ambac Assurance Corp.

Ambac spokesman Peter Poillon did not comment on the plan.

Additional banks are likely looking to rescue separate ailing monolines, such as MBIA Insurance Corp., Financial Guaranty Insurance Co., and XL Capital Assurance Inc., sources said.

The first consortium has hired Greenhill & Co. to help steer the negotiations, which market sources say are in the “very” early stages.

Wholesale downgrades for the insurers would cause Wall Street banks to write down additional losses, based on the exposure they have to credit derivatives contracts and subprime mortgage-backed securities that the insurers guarantee.

Market sources said the group was formed because of common exposure to a certain monoline insurer, and that additional groups were most likely forming along similar lines.

Oppenheimer & Co. analyst Meredith Whitney said in a report last week she expects the banks’ exposure to the monolines to cause additional write-downs of between $40 billion and $70 billion. Whitney said she believed the lion’s share of the write-downs, or 45% of the total risk in the sector, is concentrated among Citigroup Inc., UBS, and Merrill Lynch & Co.

Merrill Lynch Chief Executive Officer John Thain said at a conference last week that his bank has a total of $6 billion in exposure to the monolines, including $1.9 billion it wrote off for the fourth quarter on securities wrapped by ACA Financial Guaranty Corp. He also said that solutions targeting individual companies are more likely, rather than an industry-wide solution.

The discussions and the formation of the initial bailout group come after New York State Insurance Superintendent Eric Dinallo sat down with Wall Street banks on Jan. 23. A spokesman for Dinallo said the department could not talk about recent developments.

“While we cannot discuss specifics, there are a number of developments relating to the bond insurers,” Dinallo said in a statement. “We are continuing to communicate with all parties to help them reach firm deals as soon as possible.”

Standard & Poor’s last week downgraded FGIC to AA, while putting MBIA and XL Capital on credit watch with negative implications. Standard & Poor’s has already placed Ambac on negative watch. Fitch Ratings in recent weeks has downgraded Ambac to AA, FGIC to AA, and XL to A. All three remain on negative watch.

Meanwhile, Moody’s Investors Service held a conference call Friday morning to discuss the ongoing analysis of the rating of the bond insurers. Moody’s analyst Ted Collins said during the call that “some existing firms are likely to lose their rating,” based on the agency’s ongoing evaluations.

On Jan. 30, Moody’s amended its projected loss estimates for 2006 subprime mortgages, saying losses could now be in the range of 14% to 18% with further actions on other securities set to come. As the loss estimates are updated, Moody’s will use them to examine the ratings of the bond insurers.

“Our estimate of capital needed to support the mortgage-related risk of some guarantors has risen significantly due to changing circumstances,” Moody’s said in a report Thursday evening.

Collins said during the call that the effect on the capital adequacy of the bond insurers will be “material.” Moody’s will consider the governance of the companies, their access to capital, the overall industry structure, past and future risk management, and the present business model when considering the bond insurer’s rating.

Moodys’ said it expects to conclude its ratings reviews by mid to late February. Findings will be announced for each company individually, as the relevant research is conducted.


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