Assured Guaranty Ltd. Friday agreed to purchase Financial Security Assurance Holdings Ltd., excluding its financial products business, from Franco-Belgian bank Dexia SA, making another major change to an already radically transformed bond insurance industry.
The $722 million deal — composed of cash and stock — will bring under one roof the two largest providers of bond insurance this year. It also continues the growth of Assured Guaranty, whose bond insurer subsidiary Assured Guaranty Corp. ranked near the bottom of the insurance tables for 2007 after it became rated triple-A by all three credit agencies in the middle of that year.
“We are delighted with this fantastic opportunity,” Dominic Frederico, president and chief executive officer of Assured Guaranty, said in a statement. “Not only do we create significant value for our shareholders, the combination of the two organizations will create the premier financial guaranty company with the talent, capacity, financial resources, and relationships to serve the demands of our customers.”
Assured will acquire FSA for $361 million in cash and 44.6 million common shares, buying FSA for 37.5% of its book value. Assured will issue common stock to finance the cash portion of the transaction, with funds affiliated with billionaire Wilbur Ross’ WL Ross & Co. — already a major investor in the company — agreeing to provide a backup investment commitment for the offering. Assured will also assume $730 million in FSA’s outstanding debt.
Net of reinsurance, FSA’s insured portfolio had a net par value of $425 billion, with $315 billion related to public finance and $110 billion related to asset-backed securities, Dexia said.
The deal excludes FSA’s financial products unit. Even though Financial Securities Assurance Inc. backed many guaranteed investment contracts in that portfolio, Dexia and the governments of France and Belgium will assume all financial responsibility for the business.
As result of the deal, Dexia will become a 24.7% shareholder in Assured, although Assured can increase the amount of cash it pays, lowering that percentage. During a conference call with investors, Dexia chief executive officer Pierre Mariani said he expects the company will be a passive investor in Assured, and could look to sell its stake once its 12-month lock-up period expires.
The deal needs approval from state regulators, but Frederico said in an interview with The Bond Buyer that the insurance departments in New York and Maryland had been “extremely supportive.” A spokeswoman from the Maryland Insurance Administration said it would review the deal when the appropriate files came in. Lawyers from both companies determined antitrust concerns are unlikely, because issuers have the option to use other forms of — or no — credit enhancement, and the business has relatively low barriers to entry, Frederico said.
The deal also hinges on the rating agencies confirming the acquisition would not have a negative impact on the ratings of FSA or Assured. Fitch Ratings Friday said it did not expect the deal would have a negative impact on the ratings of either company. Moody’s Investors Service said it will take the deal into account as it finishes its review of both Assured Guaranty Corp.’s and Financial Security Assurance Inc.’s triple-A ratings — which it expects to conclude in the “near term” — noting the steps Dexia has taken with the European governments to mitigate the risks of FSA’s asset management business.
Assured Guaranty Corp. currently has a triple-A rating from all three agencies, with its rating from Moody’s on review for downgrade since July 21. FSA’s triple-A rating is on review for downgrade at Moody’s, and on negative watch at Standard & Poor’s and Fitch.
