Moody's Investors Service Monday downgraded Syncora Guarantee Inc. to Ca from Caa1 after the bond insurer reported a $2.4 billion statutory deficit thanks to further loss reserve and credit impairment charges it took on mortgage-related exposures in the fourth quarter. The outlook is developing.
Parent Syncora Holdings Ltd. last week said in a Securities and Exchange Commission filing that it had signed a nonbinding letter of intent with many of its counterparties to commute some of its structured finance exposures. It also reported it had agreed to set up a fund that would purchase some of the residential mortgage-backed securities it insured.
Syncora itself warned that without the completion of these agreements, it will continue to report a statutory surplus, which could lead to intervention from the New York Insurance Department. The department has so far held off on intervening, giving Syncora time to negotiate with its structured finance counterparties.
"To the extent Syncora is able to commute these exposures under terms that are consistent with those outlined in Syncora's recent SEC filings, SG's insurance financial strength ratings could be confirmed or upgraded," Moody's said. "If, however, the company is unable to execute a settlement that improves its capital adequacy profile, the insurance financial strength ratings would likely be downgraded to C."
The downgrade to Syncora makes it Moody's lowest-ranked financial guarantor. A further downgrade to C, the lowest-rated class of an insurance company, means it "can be regarded as having extremely poor prospects of ever offering financial security."
In the nonbinding letter of intent, Syncora agreed to give counterparties approximately $1.2 billion in cash, 40% of the outstanding common shares of its stock, a $150 million short-term and a $475 million long-term surplus note from Syncora Guarantee, and potentially other consideration in return for commuting or transferring certain exposures.
Syncora also said it would create a new bond insurer that would reinsure certain public finance and global infrastructure credits on a cut-through basis.
