Fitch Ratings yesterday downgraded the Radian Group Inc., along with its mortgage insurance and financial guaranty subsidiaries, upon news that Radian’s planned merger with MGIC Investment Corp. would be scrapped. This included downgrading the insurer financial strength rating of bond insurer Radian Asset Assurance Inc. to A-plus from AA and put the insurer on an evolving credit watch. The Radian parent company’s long-term rating dropped to A-minus from A.The ratings on 934 municipal bond deals that Radian insures were also downgraded.“The agency viewed Radian and its mortgage insurance subsidiaries’ financial position on a stand-alone basis to be relatively weakened by recent market developments, including the significant impairment to its investment in Credit-Based Asset Servicing and Securitization LLC (C-BASS), and as a result the ratings are lowered by one notch,” Fitch said in its report.Fitch had said in two earlier press releases that downgrades would be the likely course of action if the deal fell through. Standard & Poor’s and Moody’s Investors Service said a canceled merger would put pressure on a variety of Radian subsidiaries, though they did not indicate any commitment to lowering the bond insurer’s rating.Fitch said in yesterday’s rating action that it remains concerned that Radian does not have enough capital stocked up to maintain a AA rating with the amount of business it now insures. The rating agency also cited worries about a “seasoned $100 million collateralized debt obligation of asset-backed securities” that it said could start racking up losses for Radian in 2008.MGIC and Radian announced in a joint press release yesterday morning that they were scuttling the merger. Neither firm will make a payment in the cancellation process, and MGIC will withdraw its lawsuit seeking additional financial information from Radian, the companies said yesterday.MGIC and Radian said “current market conditions” had made the combination “significantly more challenging” and that both firms thought it was best to remain independent, according to their announcement.“Our mutual decision to terminate the pending merger represents the best outcome for both companies under the circumstances,” said S.A. Ibrahim, Radian Group’s chief executive officer, in the joint release.
With the announcement that Radian will continue business on its own, the company said it will focus its mortgage insurance business on more “traditional” lines of the sector, writing less insurance for subprime mortgages, piggy-back structures, and net interest margin securities.“We need to have our energies focussed in dealing with [market] challenges,” Ibrahim said in response to questions on an investor call yesterday. He said considerations of how best to integrate the two companies would have been a distraction.Radian said it would inject $100 million of additional capital to Radian Asset Assurance and that it would not withdraw dividends from the subsidiary in 2007 or 2008. This was not enough as far as Fitch was concerned, said Fitch managing director Tom Abruzzo.Standard & Poor’s said yesterday that Radian and its mortgage insurance subsidiaries would remain on a negative credit watch, adding that it would decide in the next three weeks whether it would affirm the ratings on these companies or lower them one notch.Standard & Poor’s also said it would not put Radian’s financial guaranty subsidiaries on credit watch because it thinks Radian management would do whatever is necessary to protect the bond insurance franchise from the other, weaker subsidiaries.“Radian Asset’s capital position and operating capabilities are largely independent of those of the mortgage insurance companies,” Standard & Poor’s said in its report.The merger was originally billed as a way to weave together two similar firms into a single, stronger one to back mortgage insurance and financial guaranty contracts.But trouble was sown into the deal as increasing defaults among subprime mortgages began to take a toll on the companies and the C-Bass joint venture. On July 30, the companies announced they might have to take impairments for their entire combined $1.03 billion investments in this venture. Analysts and investors, alike, began speculating over whether this might spell end for the merger.MGIC soon stoked that speculation by announcing it was looking into the option of pulling out of the merger and later filed a federal lawsuit in Milwaukee, asking the court to demand that Radian turn over merger-related financial information.Meanwhile, both companies’ stock prices have taken a beating in recent months and the market perception of Radian’s bond insurance has deteriorated.In late July, Radian-backed municipal bonds tended to yield 55 to 60 basis points more than standard, high-grade municipal yield curves — up from the previous range of 40 to 45, according to Standard & Poor’s Securities Evaluations. By this week, Radian-backed bonds tended to yield 100 to 110 basis points more than high-grade munis.Radian Asset Assurance president Stephen Cooke said resolution of the merger questions will actually help Radian in its efforts to address concerns that have hurt the market value of its insurance.“Clearly there have been dislocations in trading value as a fall out from concern about the merger, and subprimes, and the like,” Cooke said. “But we have addressed, particularly with respect to subprime, the relatively de minimis level of our exposure to subprimes both on a stand-alone basis and an industry-wide basis.”
