Syncora Passes CDS Negotiations Deadline

The negotiation period for Syncora Holdings Ltd. and its subsidiaries to reach agreements with counterparties on credit default swaps and other financial guarantee contracts has expired, the company said in a filing with the Securities and Exchange Commission Monday night.

Syncora and the counterparties agreed Oct. 30 to extend the negotiation period, including a forbearance agreement, to Oct. 31 from Oct. 15. Syncora says it will continue negotiating with counterparties, although it cannot guarantee another extension or an agreement.

The negotiations stem from a master transaction agreement signed earlier this year with former parent XL Capital Ltd. and other financial counterparties. In July, XL Capital agreed to pay $1.775 million in cash and eight million of its class A ordinary shares to Syncora's subsidiaries in return for the "termination, elimination, or commutation" of reinsurance and other financial guarantee agreements. Syncora set aside $820 million in cash and other assets - along with the 46% of Syncora stock XL Capital transferred into a trust - to pay counterparties to commute other agreements.

Restructuring $52.9 billion in exposures with 17 counterparties was the company's "primary objective," Syncora said when it reported its second-quarter earnings. Through credit default swaps, 22 counterparties held a total of $59.4 billion in exposure to bond insurer subsidiary Syncora Guarantee Inc., Syncora Holdings said at that time.

Syncora in July agreed to pay Merrill Lynch & Co. $500 million to commute eight credit default swaps backing $3.74 billion, which, along with the XL Capital deal, helped Syncora avoid insolvency, the New York Insurance Department said. Syncora hired JPMorgan last month as an adviser as it works out additional settlements.

Moody's Investors Service last month downgraded Syncora Guarantee to Caa1 with direction uncertain from B2 with a negative outlook, citing higher-than-expected mortgage-related losses. Moody's would likely upgrade Syncora's rating if Syncora reduces the CDS exposures, although likely not above junk status, Moody's said.

XL Capital Ltd. reported a loss of $1.42 billion related to the deal, mostly from the cash payment it made to Syncora, it said in the third-quarter earnings release it filed Monday night with the SEC.

XL Capital did not hold an investor conference call, but chief executive officer Michael McGavick told investors and analysts during a preliminary earnings announcement last month that "a strategic mistake was getting into a business we shouldn't have been in," referring to Syncora.

Today, MBIA Inc., Ambac Financial Group, Inc., and Radian Group Inc. will all report their third quarter earnings. Assured Guaranty Ltd. is scheduled to report its earnings for the third quarter tomorrow.

Many of the bond insurers saw net earnings soar in the second quarter as a result of accounting rules requiring them to discount the fair value of the derivative liabilities based on the market's perception of their own risk of non-payment.

As credit spreads on their own debt widened, reflecting a higher perceived risk of non-performance, the companies saw their unrealized mark-to-market gains increase. The gains will reverse if credit spreads narrow.

Ambac, for instance, posted a second-quarter net income of $2.80 per diluted share with the mark-to-market unrealized gains, but a $1.53 per share net operating loss, which did not include them.

The share prices of MBIA and Ambac both rose more than 10% ahead of the earnings announcements. MBIA jumped 15.07% to $10.46 and Ambac rose 10.39% to $3.40. Shares of Assured finished up 6.96% to $11.22, and shares of Radian remained almost unchanged, slipping 0.84% to $3.53.

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