Sell Side

FGIC Corp. Files for Chapter 11

FGIC Corp., the holding company of beleaguered bond insurer Financial Guaranty Insurance Co., announced Wednesday that it had filed for Chapter 11 bankruptcy protection.

The insurance holding company, which was founded in 1983, filed in the U.S. Bankruptcy Court for the Southern District of New York. The document includes a plan of reorganization providing holders of unsecured claims “substantially all” of FGIC Corp.’s $11.5 million in cash.

Total outstanding debt as of Tuesday was $391.5 million, according to court documents.

“The Chapter 11 filing will enable the company to deleverage its balance sheet and restructure more than $300 million of debt,” FGIC Corp. said in a statement, predicting it will “progress quickly” through the Chapter 11 case because of the small number of creditors.

Upon agreement with four key creditors, a reorganized FGIC Corp. plans to be capitalized “with no more than $400,000 to fund its business needs,” according to John Dubel, chief executive officer of the holding company and insurer.

The holding company’s primary subsidiary, FGIC Co., is not part of the bankruptcy.

Once the fourth-most active insurer in 2007 — when it wrapped $29.62 billion in municipal deals, according to Thomson Reuters — FGIC Co. has not written any new bond insurance policies since January 2008 after suffering near-fatal losses from insuring risky mortgage assets that defaulted during the financial crisis.

Since that time, FGIC Co. also has not paid any of the dividends on which FGIC Corp. relies for its revenues.

Bondholders with FGIC Co. insurance will be “unaffected” by the bankruptcy, said a source at FGIC Corp. who did not want to be identified.

“There is no change to anything that’s happening at the insurance-company level. This is simply exchanging the debt at the parent company for cash and equity, which is a very simple restructuring, ” the source said.

Privately held FGIC Corp. is based in Delaware.

The majority of FGIC Co.-insured bonds were reinsured in January 2009 by National Public Finance Guarantee Corp., the investment-grade, muni-only insurer owned by MBIA Inc.

Kevin Brown, a spokesman for MBIA, said the bankruptcy filing “has no impact on the reinsurance agreement” and that FGIC policyholders covered by the agreement “can continue to rely on the protection provided by National.”

Andrew Mais, a spokesman for the New York Insurance Department, confirmed that the holding company “is not a regulated entity and its bankruptcy proceeding is not a matter that impacts the operation of the insurance company subsidiary.”

The Insurance Department regulates subsidiary FGIC Co.

FGIC Corp. defaulted Jan. 15 on its credit agreement and senior notes.

The outstanding debt included $261.9 million of bonds maturing in 2034, as well as a $46 million term loan maturing this year, according to data from Bloomberg LP.

Wilmington Trust FSB, the indenture trustee — an agent handling the administrative aspects of FGIC Corp.’s loans — holds $345.5 million, or 88.2% of its outstanding debt.

Adam Berman, a Wilmington vice president, confirmed that the agent will be involved in finding an acceptable plan for the creditors, but declined to comment further.

JPMorgan Chase holds $46 million, or nearly 12%, of the remaining outstanding debt. FGIC Co. holds $30,000 and Dubel & Associates holds $30,000.

Rob Haines, a senior analyst at CreditSights, said the bankruptcy was no surprise.

“This is a moot point at this juncture,” Haines said. “It was inevitable that FGIC was going to go bankrupt at the holding company.”

Haines said the holding company only had two options given the degree of wreckage on its balance sheet.

Either it would be seized somehow by the insurance regulators, which would be a technical default “under the cross-default language of the indentures.” Or, it would run out of cash.

The timing was hard to guess because of the scarcity of details available about the holding company’s financial position. FGIC Corp.’s most recent consolidated quarterly filing covers the third quarter of 2009, when it posted a deficit in excess of $1.2 billion.

Ernst & Young LLP conducted an independent audit of the company for all of 2009, published in February. It placed FGIC Corp.’s total consolidated deficit to shareholders at $1.45 billion.

The Ernst & Young auditors concluded there was “substantial doubt regarding the company’s ability to continue as a going concern.”

FGIC Co.’s balance sheet is not ­expected to ever begin paying the holding company any dividends, Haines said.

The insurer posted a net loss of $324 million in the first quarter of 2010, while its net deficit was $1.64 billion, according to FGIC Co.

“It was a really just a waiting game — waiting for FGIC [Corp.] to burn through its cash,” Haines said.

About 99% of the holding company’s common stock is owned by four holders, according to court documents: GE Funding Holdings Inc., Blackstone Group LP, Cypress Group LLC, and CIVC Partners LP.

These common stock holders had already agreed to “the cancellation of their equity interests” pursuant to the reorganization plan, Dubel said in the court filings.

General Electric Capital Corp. acquired FGIC Corp. in 1989. It sold 95.5% of its common equity interest in December 2003 to a diversified group of investors including those above as well as PMI Mortgage Insurance Co. PMI sold its equity interest last month.

GE Fundings continues to hold 100% of FGIC Corp.’s preferred stock, which carries an aggregate liquidation preference of about $330 million, court documents show.


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