The cream rose further to the top of the financial guaranty business Friday, as Assured Guaranty Ltd. announced a potential $1 billion capital infusion from Wilbur Ross, and Berkshire Hathaway Assurance Corp. was approved to do business in the state of Maryland.
MBIA Inc., parent of MBIA Insurance Corp., meanwhile, said it would suffer additional mark-to-market losses related to residential mortgage-backed securities.
Assured announced an initial $250 million capital infusion and an option for $750 million more from billionaire investor Ross, who will also be appointed to the financial guarantor's board of directors.
Ross, the chief executive officer of WL Ross & Co., will purchase $250 million of common shares of Assured, to be priced as a reflection of the current market price. In one year's time, Assured will also have the opportunity to sell an additional $750 million of common shares to Ross, as long as the financial guarantor's direct and reinsurance ratings are maintained.
Merrill Lynch & Co. acted as Assured Guaranty Ltd.'s financial adviser for the transaction, set to close in April.
Assured Guaranty Corp. is one of only two stable, triple-A rated financial guarantors operating in the marketplace today and the money will be used to write new business, said Sabra Purtill, Assured's managing director for investor relations and strategic planning. She said the $750 million will only be drawn upon if Assured feels that it can be appropriately used for writing new business.
"They don't need the capital but what they are going to be using the added capital [for] is to write more business," said CreditSights analyst Rob Haines. "As they have seen the other financial guarantors stumble, it has become a market opportunity."
Assured will likely use it for writing a combination of direct financial guaranty policies and reinsurance contracts, Purtill said. Last year, Ambac Assurance Corp. ceded $29 billion of its book to Assured Guaranty Re, the largest reinsurer in the market. Purtill said Assured may pursue similar deals going forward.
Financial Security Assurance Inc., the other stable, triple-A rated financial guarantors operating in the muni market, last month announced a $500 million capital infusion from its parent, Dexia SA, to enable it to add capacity and write new business, positioning it to take advantage of its unblemished balance sheet in the volatile market. The news came as some surprise to market participants who had been expecting Ross to invest in one of the struggling bond insurers, like MBIA or Ambac.
Ambac received some benign news when Moody's Investors Service said Friday that it had concluded a review of the risk associated with Ambac's residential mortgage backed-securities and mortgage-related collateralized debt obligation exposures, finding that the bond insurer has capital that exceeds the minimum Aaa standard but falls about $2 billion below the target level for a Aaa. Moody's said it will continue to review the company for a possible downgrade.
"We thought it was appropriate to update the market on our conclusions in that respect but to state that the review continues," said Moody's managing director Jack Dorer.
Later Friday, Ambac said it would slash its dividend to 1 cent, from 7 cents, and cease writing new structured finance business for the next six months. Chief executive officer Michael Callen said suspension of writing structured finance business is expected to free up $600 million in capital.
Because of Moody's ongoing review, Ambac has not written many new public finance policies, opening up an opportunity for Assured to put its new capital to use.
"The idea is to put money into a company that will be growing and is in a stable situation and can be a market leader," said Andrew Wessel, an equity analyst for JPMorgan. "[Wilbur Ross] recognizes the amount of franchise damage that has been done at both Ambac and MBIA and if he is going to participate there it would be a different valuation and he would be looking to get in at a distressed price rather than a market price."
Ross also told Reuters Friday that the capital would be used to "reposition" the company through acquisition. As Assured's peers like Financial Guaranty Insurance Co. and Security Capital Assurance's XL Capital Assurance Inc. have been downgraded or threatened by downgrades, like MBIA or Ambac, they could begin to cede aspects of their muni books to reinsurers like Assured or Berkshire Hathaway.
"Ross has mentioned that he sees this as a vehicle for consolidation," Wessel said. "I think that is possible but only if [the struggling insurers] start reinsuring off large slugs of their portfolio in order to best serve policyholders."
As a board member at one of the stronger bond insurers, Ross and his capital will be well positioned to take up market share and become a dominant player, Haines said. Purtill said it would be used to help Assured survive a potential contraction in the industry, and that she would be surprised if Ross invested in any of the other triple-A rated bond insurers.
"I would find it unusual for him to invest in another bond insurer having made such a strong commitment to our business," Purtill said. "I think there's an expectation that there are only going to be a handful of survivors in this industry."
Regardless, Friday's announcement shows that another wealthy investor has confidence in the industry, despite the comments of some analysts that the current fallout could be the end of it.
"I think it is another vote of confidence, the same as we got when Berkshire came into the market, that there is going to be a market longer term for bond insurance," Haines said. "It isn't going to be the same players and some companies will go into runoff, but I think there is a future."
Berkshire received a license to do business in Maryland Friday, where struggling bond insurer ACA Capital Assurance is domiciled.
"We hope that this can help add some additional capacity to insure municipal bonds, as well as some stability to the municipal bond market," said Maryland insurance commissioner Ralph Tyler.
The stability will not come easily. MBIA said Friday in its annual report that it expected further mark-to-market losses for January, because of widening spreads and rating actions taken by Fitch Ratings and Standard & Poor's on residential mortgage-backed securities. MBIA also said it expected to make payments for the year on losses, before reinsurance, of between $700 million and $800 million.
"The speed at which they plan on taking those losses would indicate that a lot of what they set aside for reserve is already going to be used up for the following year," JPMorgan's Wessel said. "That might cause people to start questioning whether they are properly reserved for the long haul at this point."
