In a move that aims to shore up the parent of one the most active insurers in the municipal bond market, three countries and existing shareholders yesterday propped up Franco-Belgian bank Dexia SA by injecting about $9.2 billion of capital into the company. Meanwhile, Pierre Richard, chairman of the board of directors, and Alex Miller, chief executive officer, both resigned, the company announced.
Dexia also yesterday finalized the terms and conditions of its plans to support Financial Security Assurance Inc.'s financial products unit, or FP. It has converted the unused $5 billion line of credit it provided in June into an equally sized repo facility. In addition, Dexia said it will limit its injections to $500 million of capital into the unit to cover any economic losses beyond the $316 million recognized at the end of June.
"The conversion from a liquidity line to a repo facility provides FP with ample liquidity to respond to stress case withdrawals, while giving Dexia better capital treatment," FSA chairman and chief executive Robert P. Cochran said in a statement.
"Secondly, the $500 million of capital that Dexia will inject as needed, when added to the $316 million of established reserves, brings available resources to meet economic losses to over $800 million, without consideration of potential tax benefits, which would bring the total to approximately $1.1 billion. This significantly exceeds Standard & Poor's recently published $450 million stress loss assumptions for the FP portfolio."
Dexia's exposures to the U.S. housing market through FSA have continued to put pressure on the bank. Standard & Poor's late Monday downgraded the long-term counterparty credit ratings of Dexia's core entities to AA-minus from AA, keeping its negative outlook, citing the link.
Fitch Ratings yesterday lowered its long-term issuer default rating on Dexia and its core entities to AA-minus with a stable outlook from AA-plus with a negative outlook.
Standard & Poor's yesterday raised its rating on Dexia's core entities to stable following news of the capital injection.
"In our view, the injection provides a very strong cushion against possible higher-than-expected impairments both in Dexia's securities portfolio and at its subsidiary, U.S. monoline insurer Financial Security Assurance Inc.," said Standard & Poor's analyst Taos Fudji in a statement.
FSA said in August it will exit the asset-backed securities business to focus on the public finance sector. It has previously said it expects earned revenues of $700 million following the run-off of that ABS business and to free up capital of $1 billion as risks expire.
Under the terms of the capital raising plan, Dexia will receive an injection from the governments of Belgium, France, and Luxembourg through equity offerings and convertible bonds. In addition, a number of Belgian regional governments and institutional shareholders and a state-controlled French investment firm will invest in Dexia.
Dexia serves as one of the largest providers of credit enhancement in the municipal market. It ranks as the top standby purchase agreement agent, working on 72 issues with a par value of $7.48 billion this year, and third as a letter of credit provider, working on 45 issues with a par value of $3.9 billion this year, according to Thomson Reuters.
In addition, FSA ranks as the top bond insurer, wrapping 1,317 deals with a par value of $37.7 billion this year, although business has slowed since Moody's Investors Service in late July put the insurer's triple-A rating on review for downgrade in late July.
The turmoil surrounding Dexia could have an impact on the short-term market, wrote Matt Fabian, managing director at Municipal Market Advisors, in his weekly report.
"Regardless of their actual health, the trajectory of firms facing crises of confidence is difficult to predict," Fabian wrote. "This could reasonably undermine demand to reinvest cash in muni money markets or money market holdings in FSA-insured floaters (and Dexia/FSA accounts for a large portion, perhaps a majority, of outstanding [variable-rate demand notes], meaning more upward pressure on floating rates)."
Elsewhere in the bond insurance market, the New York Insurance Department last week approved MBIA Inc. taking on $184 billion of Financial Guaranty Insurance Co.'s $200 billion public finance book. The deal "is in the best interest of the people of the state of New York and will help stabilize the monoline insurance industry" wrote the department's deputy superintendent Michael Moriarty in a document posted on FGIC's Web site.
A committee of counterparties and five other entities all raised objections to the deal during the comment period, the approval document said. One complaint came from the Louisiana Stadium and Exposition District, which wanted MBIA to reinsure FGIC-backed bonds the district issued in 2006 that were not included in reinsurance deal. The Insurance Department overruled the objection, believing the district will benefit as a issuer and bondholder from FGIC's enhanced capital surplus and claims paying ability.
In addition, Pershing Square Capital Management LP alleged that both MBIA and FGIC are insolvent, a claim the department said was "without merit." Pershing has held a short position in MBIA, and its manager William Ackman has been among the loudest critics of MBIA and a number of other bond insurers in the past.
FGIC officials would not comment on a timeline for closing the reinsurance transaction.