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Syncora: Suspension of Claims Payments Looms

Bond insurer Syncora Guarantee Inc. will temporarily suspend claims payments on April 26 if it does not complete transactions to reduce its structured finance exposures and meet its minimum required policyholders' surplus.

The suspension will hold until Syncora either completes the agreements and meets the minimum capital requirements or determines a comprehensive restructuring agreement is impossible, in which case it would consent to rehabilitation to the New York Insurance Department, Syncora said.

In addition, New York insurance regulators have set a final deadline of May 29 for the bond insurer to complete the agreements and fix its policyholders' deficit of $2.4 billion, according to an order the New York Insurance Department filed Friday.

Although it believes it can pay all current claims, Syncora Guarantee will suspend the payments because it does not want to "deplete financial resources" that are "necessary to effect a comprehensive restructuring at the levels of commutation payments contemplated" by the master transaction agreement, the company said.

Under the agreement, Syncora would pay counterparties $1.2 billion in cash, 40% of the outstanding shares of its stock, a $150 million short- and a $475 million long-term surplus note, and possibly other considerations, according to a nonbinding letter of intent it signed earlier this year.

Syncora - which reported a policyholders' surplus of $2.4 billion as of Dec. 31 - also wants to avoid making claims payments that could be deemed preferential and "may be subject to recapture" if the company enters rehabilitation or liquidation.

It is believed that this would likely be the first time a bond insurer will have suspended all claims payments, according to Standard & Poor's analyst Dick Smith. ACA Financial Guaranty Corp. signed forbearance agreements on collateral postings before finalizing its restructuring, while a number of others have commuted credit-default swap contracts, settling them before any claims were paid.

The New York Insurance Department signed off on Syncora's plan to restructure and eliminate its impairment to surplus "after concluding that the plan proposed by Syncora is fair to policyholders," a spokesman wrote an e-mail. The order does not limit the insurance regulator from seeking Syncora's rehabilitation or liquidation earlier than May 29.

"It is prudent in the short term not to allow payment of significant claims by an insurer that has reported itself to be insolvent," the Insurance Department spokesman wrote an e-mail. "This period will allow the insurer and its counterparties to continue negotiations without creating preferences in claims payments. If a deal cannot be consummated soon, the superintendent will move to seek from the courts an order to place Syncora in rehabilitation."

Syncora has said its plan, if completed, would turn its $2.4 billion policyholders' deficit into a $150 million to $375 million policyholders' surplus as of Dec. 31. In addition to the commutations of structured finance exposure, a fund is purchasing Syncora-insured residential mortgage-backed securities, which would allow the bond insurer to increase its surplus by de-recognizing reserves for unpaid loss and loss adjustment expenses.

Under the restructuring Syncora is contemplating, it would also create a drop-down insurance company with an initial capitalization of between $200 million and $300 million that would back certain public finance and global infrastructure transactions.

Syncora is still negotiating a definitive agreement with its counterparties, it said.

The New York Insurance Department has in the past held off on putting the company into rehabilitation. Regulators had prepared to take over the company last year before Syncora signed agreements with former parent XL Capital Ltd. and Merrill Lynch & Co. that led to a capital infusion and the termination of certain contracts.

If Syncora temporarily suspends its claims payments, it could mean some bondholders with Syncora insurance and a defaulting issuer would miss receiving payments. Syncora, which backed 3,092 issues with a par value of $66.1 billion since 2001, is rated Ca with a developing outlook by Moody's Investors Service and CC with a negative outlook by Standard & Poor's.

Financially troubled Jefferson County, Ala., for instance, has relied on Syncora to help make $133.52 million in principal payments and $27.4 million in interest payments on the county's sewer warrants, according to recent federal court documents. Syncora insures $1.1 billion of the $3.2 billion of outstanding Jefferson County sewer debt, most of which is in auction- and variable-rate mode. The county has tried more than a year to restructure the debt, which threatens to bankrupt it.

As one of three plaintiffs in a federal civil suit, Syncora is seeking to have a receiver appointed to oversee Jefferson's sewer system. In addition to the principal and interest payments, Syncora has said in court documents it also spent $45.6 million toward forbearance agreements to give the county additional time to make some of its payments on the sewer warrants. Other insurers also have paid on their policies covering Jefferson's sewer debt, but Syncora has paid the most, according to court documents.

Jefferson County officials could not be reached for comment.

Shelly Sigo contributed to this story.

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