The regulatory decision to block bond insurer Financial Guaranty Insurance Corp. from paying claims has resulted in “a failure to pay credit event” according to the International Swaps and Derivatives Association.
The credit event could trigger payments on credit default swaps covering FGIC. As of Nov. 26, there were 1,276 of such swaps outstanding, which total a net notional $1.02 billion, according to the Depository Trust & Clearing Corp., which records most insurance transactions.
ISDA will hold one or more auctions to settle any transactions, where the buyers of CDS will be compensated by the sellers. Terms of the auction had not been published by press time, but will likely be held within the next 30 days, said analysts at Markit Group, a financial services company.
The New York Insurance Department requires FGIC to maintain a capital surplus of $65 million. On Nov. 24 it ordered the insurer to stop paying claims as severe losses in structured-finance deals have laid waste to its balance sheet, resulting in a third-quarter statutory deficit of $866 million. FGIC has until Jan. 5 to submit a detailed “surplus restoration plan” and until March 25 to meet its target for capital strength with the insurance regulator.
The majority of municipal bonds insured by FGIC should not be affected by the regulatory suspension, as its $184 billion municipal insurance book was reinsured by MBIA Insurance Corp. in a cut-through deal last year and subsequently transferred to MBIA’s public finance subsidiary, National Public Finance Guarantee Corp. National issued a statement on Nov. 24 affirming its coverage of FGIC’s insured municipal bonds.
