Fitch Ratings updated the rating watch on Syncora Holdings Ltd. and subsidiaries Syncora Guarantee Inc. and Syncora Guarantee Re Ltd. to positive from evolving following last week's announcement that the companies had closed deals with former parent XL Capital Ltd. and Merrill Lynch & Co.

Fitch said the revision reflects the "positive implications" of Syncora's improved financial and capital positions as a result of the deals. Fitch had downgraded Syncora Guarantee and Syncora Guarantee Re - formerly XL Capital Assurance Inc. and XL Financial Assurance Ltd., respectively - to CCC from BB July 29 because of uncertainty about the execution of the agreements.

Under the plans, Syncora's subsidiaries received $1.775 billion in cash plus eight million shares of Class A ordinary stock from XL Capital Ltd. in return for the termination of other guarantee agreements. In a separate deal, Syncora - formerly Security Capital Assurance Ltd. - paid Merrill Lynch $500 million to terminate eight credit default swaps.

Fitch said it can't determine its final ratings until it receives updated information about the recent performance of Syncora's portfolio, including its residential mortgage-backed security exposures. Until then, Syncora's rating reflects the uncertainty and weakness of its remaining collateralized debt obligations and direct RMBS exposure.

Fitch also updated its comments that the deal with Merrill Lynch could qualify as distressed under its standards because Syncora paid substantially less than the loss Fitch expected it to incur. Fitch said the payment received by Syncora from XL suggests the deal with Merrill was not a "distressed debt exchange" but that the final determination "ultimately incorporates some level of judgment."

Meanwhile, Syncora Holdings also reported its second quarter earnings, posting a net loss of $492.9 million in 2008, compared to a net income of $25.9 million in the second quarter of last year. The company attributed the loss to losses and loss adjustments of $455.6 million-primarily on direct resisdential mortgage-backed securities exposure-and a net change in the fair value of derivatives of $125.7 million. Syncora reported an operating loss of $1.288 billion for the second quarter.

The company reported a policyholders' deficit of $881.1 million as of June 30, but said it would have been a $1 billion surplus had the XL Capital and Merrill Lynch deals been included. Third quarter earnings will reflect those deals, the company said.

Syncora said it is working on more settlements, but that "there can be no assurance the company will be successful in its efforts to complete such transactions. "Despite the overall favorable impact of the transactions with XL Capital and Merrill Lynch, the company has concluded that there is substantial doubt about its ability to continue as a going concern, under applicable accounting rules, primarily because of the potential for future material adverse loss development on the Company's ABS CDO and RMBS portfolios," the company said in a statement.

The company also announced that Paul Giordano will step down as president and chief executive and resign his seat on the board of directors. General counsel Susan Comparato will serve as acting chief executive and president, while remaining in her current role, the company said.

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