Syncora Guarantee Executes Agreement With Counterparties to Restructure Its
Entire Credit Default Swap Portfolio
NEW YORK, May 28 /PRNewswire-FirstCall/ -- On May 28, 2009, Syncora Guarantee
Inc. ("Syncora Guarantee") executed a master transaction agreement (the "2009
MTA") with all 25 of the financial institutions that are counterparties (the
"Counterparties") to its credit default swap ("CDS") transactions and certain
financial guarantee insurance policies to restructure certain of its
obligations.
Set forth in this press release is a summary of the terms of the 2009 MTA, as
well as Syncora Guarantee's pro forma financial position in accordance with
statutory accounting principles, as prescribed and permitted in the State of
New York ("SAP"), as of March 31, 2009, as if Syncora Guarantee had
consummated (i) the 2009 MTA and related agreements and (ii) the offer to
acquire 56 different classes of residential mortgage backed securities
("RMBS") insured by Syncora Guarantee by the BCP Voyager Master Funds SPC,
Ltd., acting on behalf of and for the account of the Distressed Opportunities
Master Segregated Portfolio pursuant to an RMBS transaction agreement (the
"RMBS Transaction Agreement") at a level that would achieve 72 remediation
points as described in the offer.
The New York Insurance Department (the "NYID") has ordered that, by no later
than May 29, 2009, without limiting the NYID's power to institute
rehabilitation or liquidation at an earlier date, Syncora Guarantee take such
steps as may be necessary to remove the impairment of its capital and return
to compliance with its regulatory required minimum surplus to policyholders.
Syncora Guarantee must close the transactions contemplated by each of the 2009
MTA and related agreements and the RMBS Transaction Agreement in order to
comply with this order.
The 2009 MTA and Related Agreements
On May 28, 2009, Syncora Guarantee and all 25 Counterparties executed the 2009
MTA, which effectively commutes or restructures 100% of Syncora Guarantee's
$56 billion of CDS exposure. The 2009 MTA provides for the effective
commutation of Syncora Guarantee's financial guarantees of CDS relating to
collateralized debt obligations of asset-backed securities ("ABS CDOs") with
an aggregate par approximating $15 billion and case basis loss reserves in
accordance with SAP approximating $4.6 billion. This represents 100% of
Syncora Guarantee's CDS exposure for which Syncora Guarantee has reserves or
expects losses respecting ABS CDOs and substantially all of the company's
financial guarantee exposure to ABS CDOs with expected losses. Additionally,
approximately $40 billion of CDS exposure with no loss reserves will be
novated to Syncora Capital Assurance Inc. ("Drop-Down Company"), a
newly-formed, wholly-owned New York financial guarantee insurance subsidiary
of Syncora Guarantee. Syncora Guarantee has agreed under limited
circumstances to insure certain principal and interest claims relating to
these novated CDS's.
However, the 2009 MTA and related agreements remain subject to satisfaction or
waiver of substantial closing conditions, including the successful
consummation of the offer pursuant to the RMBS Transaction Agreement, which
includes the tender of eligible RMBS that in the aggregate total 72
remediation points. No assurance can be given that the 2009 MTA will be
consummated. The transactions contemplated by the 2009 MTA and related
agreements are described below.
The execution of the 2009 MTA by all 25 Counterparties allows Syncora
Guarantee to use certain segregated funds (aggregating approximately $853
million as of March 31, 2009) allocated for restructuring of counterparty
obligations pursuant to the terms of the Master Commutation, Release and
Restructuring Agreement, dated July 28, 2008, as amended, and related
commutations and releases (the "2008 MTA").
The terms of the 2009 MTA include:
(i) The Counterparties will effectively commute certain CDS and related
financial guarantee policies in exchange for consideration consisting of (a)
$1.2 billion in cash, (b) the issuance of short term surplus notes of Syncora
Guarantee in the aggregate principal amount of $150 million, (c) the issuance
of long term surplus notes of Syncora Guarantee in the aggregate principal
amount of $475 million, (d) the transfer to such Counterparties or their
designees of the approximately 40% of the outstanding shares of the common
stock of Syncora Holdings Ltd., the parent of Syncora Guarantee ("Syncora
Holdings"), following the transaction and (e) certain additional consideration
totaling approximately $50 million;
(ii) Syncora Guarantee has formed Drop-Down Company to:
(a) reinsure on a cut-through basis certain of Syncora Guarantee's public
finance and selected global infrastructure business pursuant to a Quota Share
Reinsurance Treaty between the Drop-Down Company and Syncora Guarantee; and
(b) novate from Syncora Guarantee substantially all financial guarantee
insurance policies issued on CDS's (which are not subject to commutations
covered by the 2009 MTA) pursuant to an Assumption, Reinsurance and Novation
Agreement, subject to the insurance of certain principal and interest claims
by Syncora Guarantee under certain limited circumstances.
Syncora Guarantee will capitalize Drop-Down Company with cash and qualified
investment securities in an amount of $541.5 million in return for which
Drop-Down Company will issue to Syncora Guarantee 100% of its common stock, a
short-term surplus note in the principal amount of $150 million and a
long-term surplus note in the principal amount of $200 million. Syncora
Guarantee will provide an additional CDS and related financial guarantee
insurance policy to each counterparty to a CDS contract that is novated to
Drop-Down Company that insures principal and interest shortfalls on the
reference obligations to the extent that Drop-Down Company is unable to pay
the CDS counterparties amounts due under the existing contracts, subject to
certain limitations and conditions; and
(iii) Syncora Guarantee and Drop-Down Company will agree not to write any new
business, except in very limited circumstances. Each of Syncora Guarantee and
Drop-Down Company will also agree to limitations on its ability to issue
equity securities, make certain distributions, merge or consolidate, transfer
or create liens, pay dividends and incur indebtedness, among other things.
The closing of the transactions contemplated by the 2009 MTA and related
agreements is subject to certain conditions, including, among others, the
satisfaction or waiver of all conditions, including, among others:
(i) the consummation of the offer pursuant to the RMBS Transaction Agreement,
including the tender of eligible RMBS that in the aggregate total 72
remediation points;
(ii) the successful negotiation of commutations or other concessions from
other third parties with respect to certain existing obligations of Syncora
Guarantee;
(iii) the receipt of all required regulatory and non-regulatory approvals,
including from the NYID; and
(iv) the issuance of a fairness opinion to the board of directors of Syncora
Guarantee and a solvency opinion to the boards of directors of Syncora
Guarantee and Drop-Down Company.
The terms of the 2009 MTA described above supersede the description thereof
provided in Syncora Holdings' Annual Report on Form 10-K, as amended, for the
year ended December 31, 2008, its Current Report on Form 8-K filed on March 6,
2009 and Syncora Guarantee's 2008 Annual Statement and its March 31, 2009
Quarterly Statement, each as filed with the NYID and available at
www.syncora.com.
Information Regarding Syncora Guarantee's Financial Position in the Event the
2009 MTA and Related Agreements and the RMBS Transaction Agreement ARE NOT
Consummated
In the event that the transactions contemplated by the 2009 MTA and related
agreements and the RMBS Transaction Agreement are not successfully consummated
and Syncora Guarantee is placed into rehabilitation or liquidation by the
NYID, Syncora Guarantee may be required to pay mark-to-market termination
payments under its CDS contracts.
Substantially all of Syncora Guarantee's CDS contracts provide for
mark-to-market termination payments following the occurrence of events that
are outside Syncora Guarantee's control, such as Syncora Guarantee being
placed into receivership or rehabilitation by the NYID or the NYID taking
control of Syncora Guarantee or, in limited cases, Syncora Guarantee's
insolvency. Mark-to-market termination payments for deals in which Syncora
Guarantee would have to pay a termination payment are generally calculated
either based on "market quotation" or "loss" (each as defined in the ISDA
Master Agreement). "Market quotation" is an amount based on quotations
received from each of four leading dealers in the relevant market that would
be paid to or by the counterparty in consideration of an agreement between
that counterparty and each such dealer to enter into a replacement transaction
that would have the effect of preserving for such counterparty the economic
equivalent of any payment or delivery in respect of the terminated transaction
that would have been required after termination of the CDS contract but for
the early termination of such CDS contract. "Loss" is an amount that a
counterparty reasonably determines in good faith to be its total losses and
costs in connection with the CDS contract, including any loss of bargain, cost
of funding or, at the election of such counterparty, but without duplication,
loss or cost incurred as a result of its terminating, liquidating, obtaining
or reestablishing any hedge or related trading position. There can be no
assurance that counterparties to Syncora Guarantee's CDS contracts, including
the Counterparties, will not assert that events have occurred that require
Syncora Guarantee to make mark-to-market termination payments.
In the event Syncora Guarantee is required to make mark-to-market termination
payments, the aggregate termination payments that Syncora Guarantee would be
required to pay could exceed $15 billion, which would significantly exceed its
ability to make such payments and, accordingly, such events would have a
material adverse effect on Syncora Guarantee's financial position and results
of operations.
On April 10, 2009, the NYID, pursuant to Section 1310 of the New York
Insurance Law, issued an order stating that, without limiting its power to
institute rehabilitation or liquidation at an earlier date, Syncora Guarantee
shall take such steps as may be necessary to remove the impairment of its
capital and return to compliance with its regulatory required minimum surplus
to policyholders by no later than May 29, 2009.
Additionally, as set forth in the order, Syncora Guarantee shall not write any
new business and, as of April 26, 2009, Syncora Guarantee shall suspend
payment of any and all claims and otherwise operate only in the ordinary
course and as necessary to effectuate a restructuring. On April 27, 2009,
pursuant to the aforementioned order, Syncora Guarantee announced that it had
suspended the payment of all claims from and after April 26, 2009 and is
operating only in the ordinary course and as necessary to complete a
successful comprehensive restructuring.
The Board of Directors of Syncora Guarantee will continue to monitor the
situation on a daily basis and, in the absence of a successful restructuring,
may, in the exercise of its fiduciary duties, request the NYID to seek court
appointment of a rehabilitator or liquidator of Syncora Guarantee.
Information Regarding Syncora Guarantee's Financial Position in the Event the
2009 MTA and Related Agreements and the RMBS Transaction Agreement ARE
Consummated
On a SAP basis, after giving effect to the transactions contemplated by the
2009 MTA and related agreements and the RMBS Transaction Agreement on a pro
forma basis as if they had been consummated on March 31, 2009, Syncora
Guarantee would have expected to report total policyholders' surplus at March
31, 2009 in the range of $100 million to $200 million, as compared to a
policyholders' deficit (unaudited) of approximately $3.8 billion reported at
March 31, 2009 before giving effect to the transactions contemplated by the
2009 MTA and related agreements and the RMBS Transaction Agreement. In
addition, at the effective date of the transactions contemplated by the 2009
MTA and related agreements and the RMBS Transaction Agreement, the
policyholders' surplus of Drop-Down Company, reflecting its initial
capitalization, would be expected to be in the range of $265 million to $315
million.
Because of the current financial condition of Syncora Holdings and Syncora
Guarantee and the regulatory consequences if Syncora Holdings and Syncora
Guarantee do not successfully consummate the 2009 MTA and related agreements
and the RMBS Transaction Agreement, Syncora Holdings' management believes that
Syncora Guarantee's SAP basis financial information is the most meaningful
financial information for evaluating Syncora Holdings' historic financial
position, as well as its financial position after giving effect to the
transactions contemplated by the 2009 MTA and the related agreements and the
RMBS Transaction Agreement. Accordingly, set forth in the table below is
certain pro forma summary balance sheet financial information of Syncora
Guarantee and Drop-Down Company, prepared in accordance with SAP, which gives
effect to transactions contemplated by the 2009 MTA and related agreements and
the RMBS Transaction Agreement as if they had been consummated on March 31,
2009. The pro forma adjustments in the table below reflect the mid-point of
the aforementioned range of pro forma policyholders' surplus discussed above.
The notes following the table and the related pro forma assumptions discussed
below should be read in conjunction with the pro forma financial information
presented in the table below.
DROP-DOWN
As of March 31, 2009 SYNCORA GUARANTEE COMPANY
($ amounts in millions) Pro Pro
Reported Adjustments Forma Forma
-------- ----------- ------ ------
Assets:
Cash and Investments $3,224 $(903) (a) $557 $903
$(1,251) (b)
$(375) (c)
$(93) (d)
$(45) (e)
Investment in subsidiaries
Drop-Down Company $- $292 (a) $292
Syncora Guarantee-UK $38 (f) $38
Other assets $185 $- $185 $-
---- -- ---- --
Total assets $3,410 $(2,338) $1,072 $903
====== ======= ====== ====
Liabilities:
Losses and loss
adjustment expenses $6,177 $(4,581) (b) $466 $-
(1,079) (c)
(52) (d)
Unearned premiums 723 (438) (a) 285 438
Mandatory contingency
reserves 286 (173) (a) 110 173
(3) (b)
(1) (c)
Other liabilities 62 $- 62 $-
-- -- -- --
Total liabilities $7,248 $(6,326) $922 $611
Policyholders' (deficit)
surplus (3,838) $- (a) 150 292
------ --- ---
3,333 (b)
705 (c)
(41) (d)
(45) (e)
38 (f)
--
Total liabilities
and policyholders'
(deficit) surplus $3,410 $(2,338) $1,072 $903
(a) Represents the journal entries to record the initial capitalization
of Drop-Down Company, as well as the reinsurance and novation of
certain business from Syncora Guarantee to Drop-Down Company. For
purposes of this pro forma presentation any surplus notes issued by
Drop-Down Company to Syncora Guarantee in connection with such initial
capitalization have been included in investment in subsidiaries in the
table above. Also, Syncora Guarantee's investment in subsidiaries is
subject to limitations under New York State Insurance Law and the
recognition of such investment as an admitted asset assumes the NYID's
approval to the extent it would otherwise be limited under the law.
(b) Represents the journal entries to record the commutation, termination
or amendment of certain of Syncora Guarantee's CDS contracts and
related financial guarantee insurance policies.
(c) Represents the journal entries to record the in substance defeasement
of RMBS tendered in connection with the RMBS Transaction Agreement
assuming consummation of that Agreement achieves a level of 72
remediation points. These entries assume the NYID will grant Syncora
Guarantee a permitted accounting practice to derecognize reserves for
unpaid losses and loss adjustment expenses relating to such RMBS.
(d) Represents certain additional commutations and concessions from third
parties related to the 2009 MTA.
(e) Represents the expected tax effect of the pro forma adjustments,
assuming Syncora Guarantee does not obtain the permission it has
requested from the Internal Revenue Service to change certain
accounting policies.
(f) Represents recognition as an admitted asset of Syncora Guarantee's
investment in its wholly owned subsidiary, Syncora Guarantee (U.K.)
Limited assuming the NYID's approval to the extent it would otherwise
be limited under New York State Insurance Law. At March 31, 2009, the
entire carrying value of this investment was not admitted by Syncora
Guarantee because it exceeded the limits under New York State
Insurance Law.
The amount of Syncora Guarantee's and Drop-Down Company's policyholders'
surplus and other financial information that would have been expected to be
reported at March 31, 2009 after giving effect to transactions contemplated by
the 2009 MTA and related agreements and the RMBS Transaction Agreement on a
pro forma basis as if they had been consummated on March 31, 2009, reflect
certain assumptions by Syncora Holdings concerning the transactions
contemplated by the 2009 MTA and related agreements and the RMBS Transaction
Agreement. These assumptions include, but are not limited to: (i)
consummation of the 2009 MTA and related agreements, (ii) composition of and
successful consummation of the tender for the minimum required amount of RMBS
pursuant to the RMBS Transaction Agreement, (iii) NYID approval of various
requests for exemptions from statutes and for permitted accounting practices
that deviate from accounting practices prescribed by SAP, including requests
to release reserves associated with RMBS acquired in the tender offer and
other commuted policies and to permit Syncora Guarantee to reflect its
investments in the Drop-Down Company and other insurance companies at the
proportionate amount of capital and surplus of such companies owned by Syncora
Guarantee, (iv) the successful negotiation of commutations or other
concessions from third parties and (v) utilization of net operating loss
carryforwards to offset income generated in connection with 2009 MTA and
related transactions and the RMBS Transaction Agreement. There can be no
assurance that the assumptions underlying the pro forma financial information
herein will not differ materially from the ultimate treatment of such
transactions and any differences may be material. There can be no assurance
that, assuming the transactions contemplated by the 2009 MTA and related
agreements and by the RMBS Transaction Agreement are consummated, the actual
amounts of policyholders' surplus and other financial information will not
differ materially from that derived based on the aforementioned assumptions.
For a description of the risks if Syncora Guarantee should become subject to
regulatory action or if Syncora Guarantee should become insolvent, see "Risk
Factors" in Syncora Holdings' Annual Report on Form 10-K, as amended, for the
year ended December 31, 2008 and Syncora Guarantee's March 31, 2009 Quarterly
Statement as filed with the NYID.
Ability of Syncora Holdings and Syncora Guarantee to Continue as a Going
Concern and Continuing Risks and Uncertainties
Syncora Holdings' management has concluded that as of March 31, 2009 there was
substantial doubt about the ability of Syncora Holdings to continue as a going
concern. In connection with the filing of Syncora Guarantee's SAP financial
statements, Syncora Guarantee's management has concluded that as of March 31,
2009 there was substantial doubt about the ability of Syncora Guarantee to
continue as a going concern. The financial information discussed above,
however, was prepared assuming that each of the companies continues as a going
concern and does not include any adjustment that might result from their
inability to continue as a going concern. For discussion of the risks and
uncertainties that Syncora Holdings and Syncora Guarantee are exposed to, see
Note 5 to the audited consolidated financial statements of Syncora Holdings
included in its Annual Report on Form 10-K, as amended, for the year ended
December 31, 2008, and Note 21 to Syncora Guarantee's March 31, 2009 Quarterly
Statement as filed with the NYID, which can be found on its website at
www.syncora.com.
Syncora Holdings' and Syncora Guarantee's management will reassess the
going-concern status of the respective companies upon the closing of the
transactions contemplated by the 2009 MTA and the related agreements and the
RMBS Transaction Agreement. The future going concern assessment of the
management of Syncora Holdings and Syncora Guarantee will be based in large
part on the reduction of ABS CDO and RMBS exposure and the mitigation of risk
of adverse loss development pursuant to such agreements, its management's
assessment of the risk of additional adverse loss development on remaining
in-force exposures and Syncora Guarantee's compliance with its statutory
minimum policyholders' surplus requirement. While the transactions
contemplated by the 2009 MTA and related agreements and the RMBS Transaction
Agreement were designed to improve the financial condition of Syncora
Guarantee, Syncora Guarantee will continue to be subject to risks and
uncertainties that could materially adversely affect its financial position.
This press release does not constitute an offer to purchase any securities or
a solicitation of an offer to sell any securities. The offers are being made
only pursuant to an offer to purchase and related letter of transmittal and
only to such persons and in such jurisdictions as is permitted under
applicable law. This press release is hereby incorporated by reference into
the Offer to Purchase, dated March 11, 2009, as amended or supplemented from
time to time, that has been provided to holders of eligible RMBS pursuant to
the RMBS Transaction Agreement.
About Syncora Guarantee Inc.
Syncora Guarantee Inc. is a wholly owned subsidiary of Syncora Holdings Ltd.
Syncora Holdings Ltd. (OTC: SYCRF) is a Bermuda-domiciled holding company.
For more information, please visit www.syncora.com.
FORWARD-LOOKING STATEMENTS
This release contains statements about future results, plans and events that
may constitute "forward-looking" statements. You are cautioned that these
statements are not guarantees of future results, plans or events and such
statements involve risks and uncertainties that may cause actual results to
differ materially from those set forth in these statements. Forward-looking
statements are subject to a number of risks and uncertainties, many of which
are beyond Syncora Guarantee's control. These factors include, but are not
limited to: Syncora Guarantee's ability to close the 2009 MTA and the RMBS
Transaction Agreement; the suspension of all claims payments; Syncora
Guarantee's ability to maintain minimum policyholders' surplus even if it
closes the 2009 MTA and the RMBS Transaction Agreement; higher losses on
guaranteed obligations due to deterioration in the credit and mortgage
markets; the suspension of writing substantially all new business; the effect
of adverse developments in the credit and mortgage markets on Syncora
Guarantee's in-force business; higher loss reserves estimates and the adequacy
of the loss reserves; uncertainty as to the fair value of CDS contracts and
liabilities thereon; decision by Syncora Guarantee's regulators to take
regulatory action such as rehabilitation or liquidation of Syncora Guarantee
at any time; Syncora Guarantee being required to make mark-to-market
termination payments under its CDS contracts; Syncora Guarantee's ability to
continue as a going concern; the performance of invested assets; payment of
claims on guaranteed obligations, including Jefferson County, Alabama and RMBS
transactions; bankruptcy events involving counterparties to CDS contracts; the
potential loss of certain control rights under certain financial guarantee
insurance; non-payment of premium and makewholes owed or cancellation of
policies; impact of the non-payment of dividends on Syncora Holdings Ltd.'s
series A preference shares on the composition of Syncora Holdings Ltd.'s Board
of Directors; uncertainty in portfolio modeling which makes it difficult to
estimate potential paid claims and loss reserves; unavailability of funds due
to capitalization of Drop-Down Company under the 2009 MTA; unavailability of
funds due to consideration expected to be paid to certain of the
counterparties under the 2009 MTA; potential adverse developments at Drop-Down
Company and recapture of business to be ceded to Drop-Down Company under the
2009 MTA; the financial condition of Syncora Guarantee (U.K.) Limited and
action by the Financial Services Authority; requirement of Syncora Guarantee
to provide Syncora Guarantee (U.K.) Limited with sufficient funds to maintain
its minimum solvency margin; challenges to the 2008 MTA and/or 2009 MTA;
ratings downgrades or the withdrawal of ratings; defaults by counterparties to
reinsurance arrangements; the interconnectedness of risks that affect Syncora
Guarantee's reinsurance and insurance portfolio and financial guarantee
products; termination payments related to less traditional products, including
CDS contracts, possibly in excess of current resources; nonpayment of premiums
by policyholders; changes in accounting policies or practices or the
application thereof; uncertainty with respect to the valuation of CDS
contracts; changes in officers or key employees; further deterioration in
general economic conditions, including as a result of the financial crisis as
well as inflation, interest rates, foreign currency exchange rates and other
factors and the effects of disruption or economic contraction due to
catastrophic events or terrorist acts; the commencement of new litigation or
the outcome of current and new litigation; legislative or regulatory
developments, including changes in tax laws and regulation of mortgages;
losses from fraudulent conduct due to unconditional and irrevocable nature of
financial guarantee insurance; problems with the transaction servicers in
relation to structured finance transactions; limitations on the availability
of net operating loss carryforwards; uncertainty as to federal income tax
treatment of CDS contracts; liquidity risks including due to undertakings with
the NYID; conflicts of interests with significant shareholders of Syncora
Holdings; limitations on the transferability of the common shares of Syncora
Holdings and other additional factors, risks or uncertainties described in
Syncora Holdings' filings with the Securities and Exchange Commission,
including in its Annual Report on Form 10-K for the fiscal year ended December
31, 2008, as amended. Readers are cautioned not to place undue reliance on
forward-looking statements which speak only as of the date they are made.
Syncora Guarantee does not undertake to update forward-looking statements to
reflect the impact of circumstances or events that arise after the date the
forward-looking statements are made.
SOURCE Syncora Guarantee Inc. and Syncora Holdings Ltd.
Investor and Media, Michael Gormley, +1-212-478-3463,
michael.gormley@scafg.com
