Syncora Guarantee Inc. is forging ahead with a plan designed to shelter its balance sheet from billions of dollars in losses even though the program did not meet its initial target.
The Bermuda-based bond insurer launched a two-pronged plan this year to try and meet regulators’ capital requirements.
The New York Insurance Department requires bond insurers to maintain a policyholder surplus — meaning assets in excess of liabilities — of $65 million. Syncora is well shy of that hurdle. The company, which wrote insurance policies guaranteeing payments on bonds and derivatives contracts, needs to either increase its assets or decrease its liabilities to placate that demand.
Syncora insures $133 billion of debt, including $52.41 billion in municipal bonds and $57.8 billion in credit default swaps, which are derivative contracts that pay off when a bond goes into default.
Like any insurer, the company must estimate the claims it is likely to face and reserve money to cover expected losses. Those reserves sap assets from the balance sheet. Every dollar reserved siphons a dollar from policyholders’ surplus.
Syncora’s balance sheet reserves $6.18 billion for losses, most of which is on credit default swaps and bonds secured by mortgage loans. As a result, Syncora in its most recent statement reported a policyholder deficit of $3.8 billion. Under normal accounting standards, the deficit would have been more than $1 billion deeper. The NYID permits the company to adopt accounting procedures leading lighter loss assumptions and thus leaner reserves.
In order to regain at least a $65 million surplus, the company’s plan is to shed the policies covering risky instruments from its books. That way, it will not have to reserve money to cover anticipated losses when the instruments default. Every dollar liberated from reserves would add to policyholders’ surplus.
The bigger prong in this plan is to ringfence the company’s CDS policies into a separate company, which Syncora intends to provide with $541.5 million by buying a stake in the new entity and lending it additional money. The company would also have to pay the counterparties on the CDS $1.2 billion in cash.
Though costly, this would reduce Syncora’s loss assumptions by $4.58 billion by cordoning loss-heavy policies into a quarantine. The upshot would be a $3.33 billion improvement in policyholder surplus, according to the company’s projections.
This arrangement is contingent on the second piece of the plan, which was to de-insure $5.9 billion in mortgage bonds insured by Syncora. It would do this through a tender offer, essentially paying insured bondholders to swap their Syncora-insured bonds for uninsured bonds.
Relieving the bonds of Syncora’s insurance would reverse loss assumptions of $1.08 billion, and after the costs of the plan would restore $705 million to policyholders’ surplus.
Should these plans succeed, the company estimated in May, policyholder surplus would be $100 million to $200 million. More than 90% of the reserved losses would be eliminated.
The tender offer did not go smoothly. The fund the company hired to conduct the tender — BCP Voyager Master Funds SPC — postponed the deadline a dozen times. As of the latest update, only $3.74 billion in mortgage bonds had been committed.
The company targeted 72 “remediation points,” an abstract term used to denote potential losses relieved. Syncora this week said it was giving up on reaching 72 remediation points and would close the tender offer anyway. It most recently reported 67 remediation points.
The tender offer expired on Wednesday. The company expects the deal to close by the middle of next week. A Syncora spokesman said he had no update on the amount tendered or the implications for the company’s assumptions about improvements on its balance sheet from the program.
The spokesman said the company expects the CDS portion of the plan to proceed, even though it was contingent on achievement of 72 remediation points in the RMBS deal.
All of this goes on only as long as the NYID allows it to. When an insurer violates the $65 million policyholders’ surplus threshold, the regulator can liquidate the company.
The NYID already froze Syncora’s claims-paying, leading to what is believed to be the first bond insurer’s default on a municipal bond claim.
Jefferson County, Ala.’s defaulted bonds were insured by Syncora.