Radian Group Inc. is seeking to sell bond insurer Radian Asset and Assured Guaranty or MBIA may turn out to be the buyer.
Much of Radian Group's activity is as a private mortgage insurer that works with FreddieMac and Fannie Mae. The Federal Housing Finance Agency is changing the capital requirements for private mortgage insurers. These requirements would disallow a large part of Radian Group's capital because of its structure, according to Macquarie Capital analysts Sean Dargan and Tanmay Gupta.
The FHFA has plans to bring the capital requirements into effect in 2015, though some insurers may be given a transition period of up to two additional years, according to Radian.
As a consequence, Radian Group is believed to be attempting to "monetize" Radian Asset, probably by selling it, Dargan said.
"In July of this year, Radian announced it hired Goldman Sachs to evaluate options for monetizing [Radian Asset]," the analysts wrote. Goldman, Sachs & Co. did not respond to an inquiry for this story.
Radian Asset Assurance wraps about $5.5 billion of outstanding municipal bonds, according to Municipal Market Advisors Weekly Outlook.
It discontinued writing such financial guaranty business in 2008, the company says on its website.
As of Sept. 30, Assured Guaranty had $329 billion in net par outstanding of United States municipal bonds. As of Dec. 31, 2013, MBIA's municipal bond insurer National Public Finance Guarantee Corp. had $277 billion in gross par outstanding of U.S. public finance obligations.
Dargan said a conversation he had with Assured Guaranty chief executive officer Dominic Frederico on the company's Nov. 7 third-quarter earnings call convinced Dargan that Assured was considering buying Radian Asset.
"What we're looking to do is to utilize the trapped surplus in our operating companies, as the acquirer of any portfolio, reinsurance or company, such that it doesn't have any impact whatsoever on our share repurchase activity," Frederico said.
Dargan said that Assured's regulators limit the amount of capital Assured can remove from its operating companies each year. However, the regulators would be OK with using the capital to purchase a company.
Assured has an excess of capital in its companies, Dargan said.
Because Radian Group is under pressure to sell Radian Asset, Assured could buy the latter at a discount.
An Assured purchase of Radian Asset would add to Assured's statutory surplus, Dargan said.
Macquarie Capital or one of its affiliates has managed a public offering of Radian Group's securities in the last 12 months, Macquarie Capital said in a disclosure.
Other sources said that both Assured and MBIA were looking at possibly buying Radian Asset. Assured and MBIA's spokespeople said that their companies had no comment.
Assured purchased Municipal and Infrastructure Assurance Corporation from Radian Asset in 2012 and renamed it Municipal Assurance Corp.
Assured has used Municipal Assurance Corp. as an insurer of only United State municipal bonds since July 2013.
According to MMA's Weekly Outlook, if Assured purchased Radian Asset, "there is no reason to assume Assured would subsequently extend its guaranty and rating to any Radian Asset policies . It could hypothetically choose to novate or reinsure selected, individual Radian exposures that have become better seasoned and better credits in the years since their issuance."
Dargan agreed that Assured may keep Radian Asset a separate entity, with Radian's bonds covered only by Radian's capital.
