China in auto power play
It might not shake up the industry just yet, but China's interest in Volvo and Saab is the start of something big in global autos, writes columnist Wei Gu. Commentary
Some bond insurers at risk of insolvency-report
By Anastasija Johnson
NEW YORK, June 9 (Reuters) - Bond insurers CIFG Guaranty, Financial Guaranty Insurance Co and XL Capital Assurance may breach capital requirements in this quarter, triggering a chain of events that could push them into insolvency, according to an analyst report.
The bond insurers could be taken over by regulators if capital levels fall below the required minimum and they are unable to raise more money.
That would force the insurers to make massive payouts on derivative contracts, which would likely wipe out all of their resources, CreditSights analyst Rob Haines said in a report published late on Sunday.
"A breach of the minimum requirement could set into motion a chain of events that would leave the company insolvent," Haines said in a report.
The insurers sold protection on assets including residential mortgage-backed debt and corporate and sovereign bonds using credit default swaps, as opposed to a traditional guarantee.
Under terms of these credit default swap contracts, if a regulator takes control of an insurer, the company would immediately need to pay out the full amount of the insurance. In return, it would receive the insured debt, which in the case of mortgage-backed securities may recover very little.
The industry regulator, the New York State Insurance Department, requires bond insurers to maintain a minimum surplus capital of $65 million and gives companies 90 days to remedy the situation if capital falls below that level.
CIFG Guaranty, Financial Guaranty Insurance Co (FGIC) and XL Capital Assurance could breach statutory requirements as soon as this quarter due to additional write downs on mortgage-backed debt, Haines said.
CIFG has only $15 million surplus capital above the requirement, the smallest cushion among the bond insurers, according to the report. FGIC has an extra $300 million of capital and Security Capital Assurance's SCA.N XL Capital Assurance is $102 million above the requirement.
Spokesmen the New York State Insurance Department and FGIC declined to comment. Spokesmen for the other companies could not be immediately reached for comment.
Industry leaders, MBIA Insurance Corp (MBI.N) and Ambac Assurance Corp. (ABK.N) that guarantee more than $1 trillion of securities, have surplus capital of $3.9 billion and $3.5 billion respectively thanks to recent capital injections, according to the report.
CIFG ON THE EDGE
CIFG's capital could already be below its statutory capital limit, Haines said.
"While it cannot be totally ruled out that the company could enter into some transaction whereby its capital levels would be replenished, we would question why potential investors would be interested in the company," he said.
CIFG would have breached the minimum level earlier if controlling shareholders, Banque Populaire and Caisse d'Epargne, which together own French bank Natixis (CNAT.PA), did not inject $1.5 billion last year. Additional support is unlikely, Haines said.
Haines echoed concerns about CIFG recently expressed by rating agencies Fitch Ratings and Moody's Investors Service.
Citing conversations with management, Fitch Ratings a week ago said CIFG may have to set aside so much money to cover losses that it will burn through much of its capital and regulators will it take over.
CIFG guarantees just under $100 billion of debt, but if regulators do it take over CIFG could have to terminate $57 billion of credit derivatives contracts immediately, Fitch said. The resulting obligations could exceed CIFG's ability to pay, and the company could default.
Guarantors may seek a forbearance agreement from counterparties until they can raise more capital if they have to terminate credit default swaps.
But this option is "increasingly difficult to execute" because of sharp declines in stock and bond prices and concerns about their long-term viability.
FGIC, whose owners include PMI Group (PMI.N), Blackstone Group (BX.N), Cypress Group and CIVC Partners, guaranteed about $313.9 billion of debt as of the end of 2007.
In early May, FGIC said it had received proposals from a range of strategic partners to shore up its capital position and was working closely with the New York State insurance department through the process. (Reporting by Anastasija Johnson; Editing by Tom Hals)
