Two public holding companies with financial guarantor subsidiaries received the type of unwelcome news Tuesday that could potentially impact the bond insurers under their control.
Radian Group Inc. said Tuesday it may sell its financial guarantor subsidiary, Radian Asset Assurance Inc., in an effort to boost capital for its mortgage business, while Security Capital Assurance Ltd said it may be kicked off the New York Stock Exchange, further dashing hopes that its bond insurer, XL Capital Assurance Inc., would see any additional capital.
The Radian announcement followed Standard & Poor's downgrade on Radian Group to BBB, from A-minus, and the rating on the mortgage insurance subsidiary Radian Guaranty to A, from A-minus. The downgrades at the parent also led Standard & Poor's to place Radian Asset's financial strength rating on negative watch.
In doing so, the rating agency said the widening rating gap between the parent and the bond insurer could hamper the business prospects of Radian Asset or lead Radian Group to draw capital from the bond insurer. Standard & Poor's suggested the financial guarantor look to further insulate itself from the larger company for the sake of ratings stability.
In response, Radian Group said it was evaluating its strategic options to "maximize the value" of the financial guarantor, which could include a sale of Radian Asset. The parent company has retained Lehman Brothers and Drinker Biddle to act as advisers as it evaluates its options.
"These alternatives could involve a full or partial sale of Radian Asset," the company said in a release. "The ultimate goal is to preserve the existing and future value of Radian Asset while also providing capital to Radian Group."
The parent is also considering a capital infusion from outside parties or a stock offering. Steve Stelmach, an equity analyst at Friedman, Billings, Ramsey & Co., expects the most likely solution to be the sale of stock.
"While management has not disclosed the details of its capital management plans, our analysis assumes that any additional capital would come in the form of common equity, although this clearly may not be the case," Stelmach wrote in a research note yesterday.
The financial guarantor has claims paying resources of $3.2 billion and "minimal exposure" to the residential mortgage-backed securities and collateralized debt obligations made up of asset-backed securities that have caused so much trouble for other insurers, Radian Group said in its release.
Radian Asset is rated Aa3 by Moody's Investors Service, AA by Standard & Poor's, and A-plus by Fitch Ratings. Radian Asset guaranteed five deals so far this year through the end of March, with a total par value of $130.8 million, making it the fifth busiest insurer in 2008, according to data from Thomson Financial. The bond insurer has also been active providing insurance in the secondary market, said John DeLuca, a spokesman for Radian Asset.
Also late Tuesday, SCA, parent of XLCA, said it had been notified by the regulatory arm of the New York Stock Exchange that its stock price was not compliant with rules governing the listing of that stock on the exchange.
SCA said in a filing with the Securities and Exchange Commission that it received notification from the NYSE last week advising it that SCA's shares - which have traded this year between an intraday high of $4.18 and an intraday low of $0.51 - were not in compliance with regulations that dictate a company's average closing price must not be below $1.00 over a consecutive 30 trading-day period.
As of April 1, 2008, SCA's common shares reached a 30 trading-day average closing price of $0.98, according to a release from the company.
SCA now has six months to bring its average share price above the $1.00 threshold, according to NYSE regulations. The rules also demand an answer, within 10 days, from the company about whether it will cure the deficiency or start delisting procedures. SCA has already told the exchange it intends to find a solution and maintain its listing.
SCA spokesman Michael Gormley said the company is working to develop a plan which it will present to the exchange "in due course."
Despite this, SCA said its efforts to prevent delisting may come up short. If the company's plan is not successful and if it violates several other regulations - one of which says the company must keep a market capitalization above $25 million - the exchange may begin suspension and delisting procedures at any time.
"Although there is a process, we reserve the right to delist a company at any time," said Scott Peterson, a spokesperson for the regulatory arm of the New York Stock Exchange. "If a company is not going to make it, it is better to just cut the cord."
XL Capital Assurance is rated A3 on review for possible downgrade by Moody's, A-minus on negative watch by Standard & Poor's, and junk-level BB with a negative outlook by Fitch. XLCA guaranteed three deals so far this year through the end of March, with a total par value of $35.6 million, making it the seventh busiest insurer in 2008, according to data from Thomson Financial.
