Assured Guaranty Ltd.’s recent settlement with UBS is a positive sign for similar representations and warranties lawsuits brought by bond insurers against banks that are ongoing.
The announcement of the $358 million settlement comes a few months after Assured Guaranty’s settlement with Flagstar Bank in February, which provided several arguments that were also applicable to its lawsuits against its other, larger R&W counterparties.
“The message those counterparties received from [U.S. District Court Judge Jed Rakoff] was that their chances of winning in court against the bond insurers were not good,” said BTIG analyst Mark Palmer. “One of AGO’s largest counterparties was UBS.”
This was Assured Guaranty’s third major mortgage-backed securities related lawsuit against major banks that has settled since 2011. The other two were against Bank of America Corp. and Deutsche Bank. The bond insurer’s other lawsuits against banks including JPMorgan, GMAC Mortgage LLC, and Credit Suisse are still outstanding.
“I think the wind is clearly at the back of the bond insurers in this process because there have been several settlements, so I think this outcome is very positive,” said Alan Schankel, managing director of fixed income research at Janney Montgomery Scott.
For the banks that are still fighting similar representations and warranties suits, Monday’s announcement could push them toward their own settlements, he said.
Assured Guaranty’s settlement resolved a lawsuit it brought in February 2012, accusing the bank of falsely representing the quality of loans underlying $1.49 billion of mortgage-backed securities. The bond insurer said it had paid out $308.2 million in claims through January 31, 2012.
Assured Guaranty is one of the two still active bond insurers in the municipal market. Its municipal-only bond insurer, Assured Guaranty Municipal Corp. is rated A2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.
While Monday’s news is a positive development, it doesn’t necessarily help out its ratings.
“Assured’s business, and the business of bond insurers generally, is based on their rating. And the ratings have diverged from claims paying ability to franchise risk,” said Matt Fabian, managing director at Municipal Market Advisors. “Assured already has AA category capital adequacy according to S&P. It doesn’t stand to reason that improving that capital adequacy number will boost their rating.”
In addition to receiving $358 million, Assured Guaranty has also entered into a loss-sharing agreement, under which UBS will reimburse the bond insurer for a portion of all future losses on certain transactions, which will be put in place by the third quarter of 2013.
“This settlement further strengthens our balance sheet by providing a substantial cash payment and certainty related to the loss-sharing arrangement on future claims,” Dominic Frederico, president and chief executive officer, said in a statement. “We have now reached favorable settlements or been awarded compensation in court with respect to approximately 55% of the par outstanding of Assured Guaranty’s troubled legacy RMBS.”
A spokesperson for UBS said the financial effect of the settlement on UBS will be insignificant due to provisions the company had previously established.
The financial impact of the settlement and other related information will be described in Assured Guaranty’s first quarter earnings press release, which is scheduled to be released on Thursday.
Assured Guaranty’s shares rose 6.48% to close at $22.18 on Monday.