Sell Side

Assured Aims for $499M Capital Raise

Assured Guaranty Ltd., the holding company of the two principal players in the bond insurance industry, is expected to raise at least $499 million of capital today when its offering of 23.9 million common shares closes with underwriter UBS Securities LLC.

UBS also has 30 days to purchase up to an additional 3.6 million common shares, which would give Assured another $76 million, for a total of $575 million in new capital.

UBS agreed to buy the shares at $20.90 each, an 8% discount to Monday’s closing price of $22.68 per share. The stock closed Thursday down six cents to $21.89.

According to Assured’s prospectus, filed to the Securities and Exchange Commission on Wednesday, the company has 156.6 million common shares outstanding as of Nov. 13, 2009.

The equity offering comes in response to the Nov. 12 statement by Moody’s Investors Service that unless capital-strengthening initiatives were undertaken, it would expect to lower Assured’s rating from Aa3 into the single-A range.

Such a downgrade could be debilitating to Assured — the parent company of Assured Guaranty Corp. and Assured Guaranty Municipal Corp., the only two bond insurers to pull through the economic crisis with ratings at the double-A level.

Dominic Frederico, Assured’s president and CEO, has repeatedly stated that while he disagrees with Moody’s “extremely pessimistic” stress-loss scenarios for his company, which center on Assured’s exposure to mortgage-related losses, he would raise the capital “solely [to] support rating agency capital requirements.”

To satisfy Moody’s Aa3 rating, Frederico said on Nov. 12 the company planned to raise $300 million through a marketed transaction and an unspecified amount through “external reinsurance that has already been negotiated” — the details of which were never released.

Instead, this week’s stock offering raises enough capital to avoid the reinsurance option. “As a result of raising approximately $500 million of additional capital in this offering, we currently do not expect to complete the third-party reinsurance arrangement portion of this plan,” Assured said in the prospectus.

Yesterday Moody’s responded to the criticism from monoline financial guarantors and mortgage insurers that its expectations for losses from mortgage-related risks are too harsh.

Moody’s noted the companies involved “are increasingly confident” in their ability to reduce losses through put-backs, claims rescissions, and denials.

“To the extent these claim mitigation strategies are successful, ultimate losses for the monoline insurers could be meaningfully lower than expected claims from defaulted mortgages, with positive effects on insurers’ credit profiles,” Moody’s said. “Ultimate recoveries, however, remain highly uncertain, and could be materially different than companies’ current estimates.”

Arlene Isaacs-Lowe, a senior vice president at Moody’s and its lead analyst on Assured, clarified that the perspective offered in the research note was already taken into account before Nov. 12, and thus has no credit implications for Assured. Moody’s had not publicly responded to the equity offering by press time.

“Certainly an equity infusion is a less complex analysis and one that is easier to analyze from the perspective of the impact of it on their capital position, but ... I would reiterate that we’d be looking at the overall plan,” Isaacs-Lowe said.

She added, “Arguably we could be more or less conservative than what actually happens, but we have already contemplated that.”

JPMorgan analyst Andrew Wessel commented that an extra $500 billion of equity capital in Assured’s investment portfolio “should be fairly dilutive to forward earnings.” As a result, he downgraded his year-end 2010 price target for Assured to $37 from $42 per share.

In order to prevent share value from falling, the transaction includes several lock-up agreements between UBS and Assured’s principal shareholders.

WLR Recovery Fund IV LP, the distressed-assets fund company headed by Wilbur Ross, owns 10.2% of Assured’s outstanding shares and has agreed not to issue any new common shares, nor offer, sell, or pledge shares for a period of 90 days. Dexia SA, which owns 13.8% of Assured’s stock, made a similar lock-up agreement valid for the next 45 days.

Spokespeople from Assured said no comment would be issued on the capital initiative until the deal closes today. In the prospectus, the company only said the fresh capital would be used “for general corporate purposes,” adding that some portion may be directed towards Assured Guaranty Corp.


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