FGIC plan could benefit muni bonds, issuers

By Anastasija Johnson

NEW YORK (Reuters) - FGIC Corp's plan to split its municipal bond business into a separate company could eventually lift values of state and local government debt it guaranteed, investors and issuers said on Friday.

The move by FGIC, which on Thursday became the first insurer to lose its top "AAA" rating from all three rating agencies, is the latest step in the rescue of the U.S. bond insurance industry.

FGIC told New York regulators it wants to separate its municipal bond business from the riskier structured finance insurance operations, New York Insurance Superintendent Eric Dinallo said on Friday.

Municipal bonds backed by FGIC could benefit if the company's plan convinces rating agencies to remove it from the negative credit watch and affirm current ratings, said Tom Spalding, portfolio manager at Nuveen Investments in Chicago.

"It's a positive factor for municipal bonds insured by FGIC," said Spalding, adding there was no immediate market reaction.

FGIC Corp had about $315 billion of bonds insured as of the end of September, including about $224 billion of municipal bonds.

Values of insured municipal bonds have declined in recent months as rating agencies cut top "AAA" ratings for many insurers because guarantors may face huge payouts on subprime mortgage securities and other risky debt.

Regulators have been working with insurers and banks to come up with a solution that would help prop up their ratings.

FGIC plans to apply to create a new insurance company, into which it would move its municipal bond insurance operations, New York Insurance Department Spokesman David Neustadt said.

Its structured finance business -- which insures repackaged consumer loans and other debt and is expected to make big payouts in coming years -- would remain in the current company.

The "good-bank/bad-bank" plan would allay fears that losses from structured finance could put FGIC, the fourth-largest U.S. bond insurer, out of business.

Issuers would also benefit because the split would ensure that premiums paid by municipal governments would not be used to pay for problems in structured finance, Dinallo said in written testimony for a U.S. House subcommittee meeting.

Garry Stewart, finance director at the West Virginia School Building Authority, said splitting FGIC "would make us feel better."

"With what's going on, it seems like a smart business decision," he said.

The authority used FGIC to insure some refunding bonds last year, according to Stewart.