Bond insurer FGIC plans to split in two
NEW YORK (Reuters) - FGIC Corp, a bond insurer that has lost its top credit ratings, has told New York regulators it wants to split into two companies, a spokesman for the state insurance regulator said on Friday.
The move is the latest step in the rescue of the U.S. bond insurance industry, which is expected to make billions of dollars of payouts in coming years after insuring bonds linked to subprime mortgage bonds and other risky debt.
FGIC, whose owners include private equity giant Blackstone Group LP (BX.N), 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.
FGIC's structured finance business -- which guarantees 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 closely held FGIC, the fourth-largest U.S. bond insurer, out of business.
If the new company's ratings are "triple A," investors will not be forced to sell billions of dollars of FGIC-guaranteed debt.
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, Stewart said.
In testimony for a U.S. House subcommittee meeting on Thursday, New York Insurance Superintendent Eric Dinallo said splitting up the bond insurers "would ensure that the funds paid by municipal governments would go to support their insurance and not pay for the problems in structured finance."
"We believe that this plan could produce enough capital to preserve the ratings of and provide protection for the municipal bonds," Dinallo said, noting that splitting up the insurers was one of several possibilities being discussed.
FGIC Corp had about $315 billion of bonds insured as of the end of September.
As of the end of the third quarter, FGIC's U.S. structured finance business guaranteed about $72 billion of debt, and the U.S. municipal bond business guaranteed about $224 billion. FGIC also had $18.5 billion of international business.
On Thursday, Moody's Investors Service cut Financial Guaranty Insurance Co's "Aaa" rating six notches. Standard & Poor's and Fitch had both stripped FGIC of its top ratings at the end of January.
The bond insurer's owners include mortgage insurer PMI Group Inc (PMI.N) and private equity firms Blackstone, Cypress Group and CIVC Partners LP. That group agreed to buy 95 percent of FGIC from General Electric Co (GE.N) in 2003 for about $1.675 billion.
RATINGS STRUGGLE
U.S. bond insurers, which guarantee more than $2.4 trillion of debt, are generally struggling to keep the top ratings crucial for winning new business.
Speaking on CNBC television, Dinallo said his efforts have been focused on preserving the top ratings for bond insurers where possible, adding that there has been "no serious dispute" that bond insurers can in the long-term pay their claims.
If bond insurers are downgraded, the bonds they guarantee are usually also stripped of their top ratings. Those ratings' changes could force some investors, namely those that can only hold top-rated securities, to sell their holdings.
Bank rescue groups were looking at ways to save FGIC and its larger rival, Ambac Financial Group Inc. Moody's Investors Service said on Thursday that in contrast to FGIC, Ambac and MBIA Inc (MBI.N) were in better positions with respect to capitalization and their business franchises.
Moody's also said it expected to complete its review of Ambac, the No. 2 bond insurer, and MBIA, the largest, within the next few weeks. The No. 3 bond insurer, Financial Security Assurance, a unit of French-Belgian bank Dexia (DEXI.BR), has largely escaped subprime related losses.
The cost of protecting FGIC obligations against default dropped on Friday, on hopes that the contracts would refer to obligations of the new company rather than the existing company.
(Additional reporting by Anastasija Johnson and Karen Brettell in New York and Karen Pierog in Chicago; Editing by Gunna Dickson, Leslie Gevirtz)
