XL prices offering for proceeds of about $2.5 bln
By Lilla Zuill
NEW YORK (Reuters) - XL Capital Ltd (XL.N), a large Bermuda-based insurer that owns a stake in troubled bond insurer Security Capital Assurance Ltd SCA.N, said on Tuesday its sale of common shares and convertible securities was priced to raise about $2.5 billion.
The money will mostly go to fund an agreement that XL reached to shed its 46 percent stake in Security Capital, including liabilities stemming from XL's 2006 spin-off of Security Capital through an initial public offering.
The pact between the two companies, brokered by New York State Insurance Superintendent Eric Dinallo, extends a lifeline to the bond insurer, which has been on the brink of insolvency, but at a cost to XL shareholders.
"While we believe (the) current agreement could overly penalize current investors, it does put XL on a path (to) separate (it) from its SCA liabilities," said Citigroup analyst Joshua Shanker, in a research note.
XL shares fell 6.2 percent to $17.23 on the New York Stock Exchange.
XL said in a statement it will sell 125 million common shares for $16 apiece. Underwriters have the option of purchasing an additional 18.75 million shares.
It will also sell 20 million equity security units at a value of $25 each, giving holders a forward purchase contract requiring the eventual purchase of stock and debt.
Underwriters have the option to purchase an additional 3 million of the convertible units, XL said.
The offering is being led by Goldman Sachs and UBS Investment Bank.
LIFELINE
On Monday, Security Capital also reached an agreement with Merrill Lynch & Co Inc MER.N to cancel $3.5 billion in credit default swaps and end litigation in exchange for a $500 million payment to Merrill.
Bond insurers have been battered by their exposure to complex mortgages and other debt, leading several of them to lose high credit ratings. Security Capital, one of the worst hit, stopped writing new business after a fourth-quarter loss of $1.2 billion.
Under the agreements reached this week, Security Capital will increase its capital to about $1 billion.
The deals have raised the possibility of similar bailouts being reached with other bond insurers in need of capital to stay in business.
EXIT STRATEGY
Under its pact with SCA, XL will pay $1.77 billion in cash to Security Capital and issue 8 million Class A common shares to it. In return, XL will no longer be tied to risks that Security Capital held before its IPO, through the cancellation of $64.6 billion in guarantees.
Security Capital's troubles, which came to light last year, have been a lingering cloud over XL, with investors fearful that the bond insurer's woes could drag down its former parent.
Michael McGavick, who became chief executive at XL about three months ago, told investors on Monday the agreement will allow XL to put those concerns behind it.
XL's stock has fallen about 77 percent over the past year, compared with a 34 percent decline in the S&P Insurance Index .GSPINSC.
The stock's recovery may take time, with Citigroup's Shanker saying he sees few new buyers given the current financial markets climate.
(Editing by Steve Orlofsky/Jeffrey Benkoe)
