Moody's Investors Service has upgraded Radian Group Inc.'s senior debt rating to Caa1 from Caa2, with a positive outlook. In addition, Moody's has affirmed the Ba3 insurance financial strength ratings of Radian Guaranty Inc. (Radian Guaranty) and Radian Mortgage Assurance Inc. (RMA), and the Ba1 IFS rating of Radian Asset Assurance Inc. (Radian Asset).
The outlook for Radian Guaranty and RMA have been revised to positive, from negative, while the outlook for Radian Asset remains negative.
On February 26, Radian announced the concurrent public offering of 39.1 million shares of its common stock in a public offering at a price of $8 per share and $400 million aggregate principal amount of its convertible senior notes due 2019. The offerings are expected to close on March 4, subject to customary closing conditions.
Moody's said that the upgrade of Radian's senior debt rating reflects the holding company's improved liquidity position and demonstrated ability to access capital markets, following its capital raise. The Caa1 senior debt rating reflects the ongoing stress at its mortgage insurance subsidiaries and meaningful debt burden relative to its liquidity. Dividends from Radian Guaranty are unlikely for the foreseeable future given its weak regulatory capital position and Moody's believes that, despite the significant addition to liquidity from its capital raise, the holding company may not be able to meet all of its senior debt obligations without further improvement in the performance of its subsidiaries.
After adjusting its December 31, 2012 unrestricted cash and liquid investments for the expected proceeds from the issuance of common stock and convertible debt, Radian has remaining unrestricted cash and liquid investments of approximately $1 billion before taking into consideration any capital contributions to Radian Guaranty. Radian stated that it expects to maintain a risk-in-force to capital ratio below the 20 to 1 at Radian Guaranty and may have, as a result, to make additional capital contributions to its subsidiary over the next few years, decreasing the amount of liquidity retained at the holding company.
The affirmation of the Ba3 IFS ratings of Radian Guaranty and RMA reflects: 1) their consolidated financial resources, including potential for further dividends from Radian Asset, in excess of Moody's base case losses, and 2) their ability to continue to write new business for some time given counterparty forbearance and the company's ability, thus far, to remain below the minimum regulatory risk-to-capital threshold of 25 to 1. Some states require mortgage insurers to operate below a 25 to 1 risk-in-force to capital ratio, which Moody's believes Radian will likely remain below for the duration of this year. New, higher quality business production has partially mitigated legacy losses, which have decreased since the prior year, and enhances Radian's chances of a turnaround.
The affirmation of the Ba1 rating of Radian Asset, Radian Guaranty's wholly owned financial guaranty subsidiary, reflects 1) its strong capital profile and orderly runoff, and 2) the group's dependence on Radian Asset's resources to support Radian Guaranty's strategic mortgage insurance business. Portfolio amortization and recent commutations contributed to reduce insured portfolio expected and stressed losses.
Radian Asset has been paying regular dividends to Radian Guaranty since 2008 and releasing redundant contingency reserves periodically to enhance its and Radian Guaranty's statutory surplus.