Sell Side

CIFG Commutation, Reinsurance Finalized

CIFG Holdings Ltd. yesterday announced it had finalized deals to commute approximately $12 billion in structured finance exposures and to have Assured Guaranty Corp. reinsure $13 billion of its U.S. public finance portfolio.

In addition, John Pizzarelli stepped down as CIFG Holdings chief executive officer, after joining the firm from MBIA Insurance Corp. in December 2007. Larry P. English, head of his own turnaround firm, will take over as chief executive officer.

The New York Insurance Department has approved the both the commutation and the reinsurance agreement, noting they leave CIFG solvent even though it had filed statutory financial statements indicating insolvency last year. The department held off on placing the company into rehabilitation as it worked on these agreements.

The previously announced reinsurance deal includes most, but not all, of CIFG Assurance NA's U.S. public finance book, excluding certain credits, such as those that are below investment grade or have loss reserves established, and other guarantees, such as credit default swaps. The structured finance commutations occurred with counterparties and bondholders holding 98% of its gross par outstanding of collateralized debt obligations of asset-backed securities and commercial real estate CDO exposure.

The deals leave CIFG with a $60 billion insured portfolio, mostly of structured finance exposures, according to Standard & Poor's, which yesterday upgraded CIFG's financial guarantee subsidiaries to BB from B. Moody's Investors Service yesterday upgraded the insurance financial strength rating of CIFG's subsidiaries to Ba3 from B3.

Under the terms of the transaction, Assured will initially reinsure all but the excluded CIFG-insured credits. The policies on the reinsured credits can then be novated, essentially replacing the CIFG policies with ones from Assured Guaranty.

Beyond the security of the reinsurance deal, novation would provide a boost for CIFG policyholders covered under the agreement. It's unclear how rating agencies will rate CIFG-backed bonds reinsured by Assured, but once the polices are novated, the policyholders would have direct Assured insurance and thus get their triple-A rating from Standard & Poor's and Fitch Ratings and the Aa2 rating from Moody's.

In addition, only bonds wrapped by Assured, Financial Security Assurance Inc., and Berkshire Hathaway Assurance Corp. trade at any sort of a premium to a similar uninsured bonds. Bonds backed by the remaining downgraded bond insurers typically trade through to their underlying credit and sometimes at a discount to similar uninsured bonds because fund managers do not want the insurer's name on their books.

"We expect that the municipal bonds currently insured by CIFG will go from junk to the highest investment grade," New York insurance superintendent Eric Dinallo said in a statement.

Although Assured has offered - and prefers - to directly guarantee the bonds, CIFG and bond trustees must handle the novation process first. Investors with CIFG policies can contact either CIFG or their trustee to find out if their policy is included in the agreement. CIFG also plans to post the CUSIP numbers covered in the deal on its Web site, www.cifg.com, a spokesman said.

CIFG will be responsible for informing trustees of the reinsurance agreement and of their option to novate the policies. The trustee must then approve the novation, typically with bondholder support, in a process that varies based on the original bond agreement.

The trustee may have to track down individual bondholders to get them to vote on the novation. Assured recommended bondholders with questions call their trustee to ensure they were aware of the novation option.

The novation transaction differs from the reinsurance deal signed last year between MBIA and Financial Guaranty Insurance Co. In that deal, MBIA backed $166 billion of FGIC's public finance portfolio through a cut-through reinsurance deal, in which the FGIC policies will remain, but policyholders can go directly to MBIA with claims.

Assured received approximately $85 million in unearned, up-front premium reserves as part of the CIFG deal.

"We are pleased to close this transaction, which provides CIFG NA's policyholders with the financial strength and protection of Assured," said Assured Guaranty Ltd. president and chief executive officer Dominic Frederico. "In these turbulent times it is important that the market recognizes the necessity and value of financial guaranty insurance."

Under the structured finance terminations, CIFG has paid counterparties cash and given them equity considerations to commute the exposures. CIFG's previous principal shareholders - Caisse D'Epargne Group and Banque Populaire Group - will each retain just 4.95% of the company and will no longer control the firm.

Pizzarelli, the former CEO, leaves the firm now that the transactions are both finalized.

"I want to applaud John for his efforts," CIFG board member Allan Chapin said in a statement. "He inherited an enormously complex and difficult situation and oversaw the negotiations which have resulted in a global agreement, which is the best possible outcome for all parties concerned."


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