Syncora Guarantee Inc. has signed a nonbinding letter of intent with most of its financial counterparties to "negotiate in good faith" on finalizing a deal that would commute certain exposures and lead to the creation of a new insurance subsidiary that would take on parts of its existing public finance and global infrastructure books of business, parent Syncora Holdings Ltd. said Friday in a filing with the Securities and Exchange Commission.
To commute or transfer certain exposures, Syncora would give counterparties approximately $1.2 billion in cash, about 40% of the outstanding common stock of the company, a $150 million short-term and a $475 million long-term surplus note from Syncora Guarantee, along with other potential payments.
In addition, Syncora Guarantee would create a new insurance company that would reinsure certain existing public finance and global infrastructure credits on a cut-through basis. It would capitalize the company with $185 million in equity and through the purchase of two surplus notes of a combined $350 million.
Syncora also said it has signed an agreement to create a fund that will purchase as much as $375 million of the residential mortgage-backed securities Syncora Guarantee insured. This could "significantly reduce" Syncora Guarantee's RMBS-related statutory loss reserves, the company said.
As of Dec. 31, Syncora reported a policyholders' deficit of $2.4 billion, well below the $65 million minimum surplus required by New York State insurance law. If the transaction considered in the letter of intent and the RMBS agreement are not completed, Syncora will continue to report a deficit and be subject to intervention from the New York Insurance Department, it warned.
The department has in the past held off putting the company into rehabilitation despite policyholders' deficits.
Eight of the nine counterparties on the counterparties' negotiating committee and 17 of 23 total counterparties have executed the letter of intent, Syncora said. At least one of the significant counterparties has told Syncora "it is not presently contemplating executing the letter of intent in its current form."
The letter of intent "contemplates" all 23 counterparties participating, but Syncora is considering other ways to proceed if necessary, it said.
The letter of intent and RMBS transaction together represent the second part of Syncora's strategic plan. Acting chief executive officer and president Susan Comparato said last year commuting $52.9 billion in credit default swap exposure was the company's "primary objective" in the near term.
Syncora last July signed agreements with former parent XL Capital Ltd. and Merrill Lynch & Co. that helped it avoid intervention from the New York Insurance Department. Syncora subsidiaries received $1.775 million in cash and stock in XL Capital in return for the commutation and termination of certain financial guarantee agreements. Syncora paid Merrill $500 million to commute eight credit-default swaps
Syncora also agreed at the time to work with counterparties to reduce its other exposures.
Syncora Guarantee also has exposure to Jefferson County, Ala.'s sewer system and has - along with Financial Guarantee Insurance Co. and bondholders trustee Bank of New York Mellon - asked a federal judge to appoint a receiver for the system.
Syncora in December began trading over the counter after the New York Stock Exchange suspended trading in its shares. On Friday, the stock closed up $0.03 at $0.16.