NEW YORK, Jan 22 (Reuters) - Bond insurer CIFG Holding said on Thursday it has terminated $12 billion in credit default swaps insuring risky assets including residential mortgages, representing around 98 percent of its exposure, in a move to boost its capital.
“This transaction substantially reduces CIFG’s exposure to problematic derivatives, resulting in a significantly improved capital position and claims paying resources,” the company said in a release.
CIFG has taken losses from selling insurance via credit default swaps on risky mortgages through vehicles known as Collateralized Debt Obligations. CDS are used to insure against the risk of a borrower defaulting on their debt.
The bond insurer canceled the CDS contacts in return for a cash payment and equity in the company, it said. “As a result of the equity consideration, the principal shareholders are no longer in control of CIFG,” it said.
Banque Populaire and Caisse d’Epargne, which together own French bank Natixis SA (CNAT.PA) took over control of CIFG from Natixis last year.
CIFG Holding is based in Bermuda, an offshore insurance market.
In its statement, CIFG added that it finalized an agreement with Assured Guaranty Corp (AGO.N) to reinsure approximately $13 billion of insurance it sold on municipal debt.
“This transaction also increases the company’s claims paying resources, better enabling the company to honor its remaining obligations to policyholders,” CIFG Chief Executive John Pizzarelli said in the release.
New York Insurance Superintendent Eric Dinallo said the agreement will result in the ratings on the municipal debt insured by CIFG being upgraded.
“We expect that the municipal bonds currently insured by CIFG will go from junk to the highest investment grade,” he said in a release.
Standard & Poor’s on Thursday upgraded its financial strength rating on CIFG by three notches to “BB”, or two notches into junk status.
The outlook is “developing,” meaning it could raise, lower or leave the rating unchanged within the next two years.
The outlook “reflects our view that the insured portfolio lacks diversity and the potential for continued adverse loss development of the remaining largely structured finance exposure,” said S&P analyst David Veno.
Reporting by Karen Brettell; editing by Walker Simon