2008-07-31 23:46:02 -
- Fitch Ratings has downgraded the following ratings on FGIC Corporation (FGIC Corp.) and its financial guaranty insurance subsidiaries Financial Guaranty Insurance Company (FGIC) and FGIC UK Ltd. as shown below:
FGIC
FGIC UK Ltd.
-- Insurer financial strength (IFS) to 'CCC' from 'BBB'.
Fitch has placed these ratings on Rating Watch Evolving.
FGIC Corp.
-- Long-term Issuer to 'CCC-' from 'BB';
-- $325 million of 6% senior notes due Jan. 15, 2034 to 'CCC-' from 'BB'.
Fitch has placed these ratings on Rating Watch Negative.
Today's rating action is based on Fitch's expectation that FGIC will experience further credit deterioration on its book of business backed by residential mortgage-backed securities (RMBS). This deterioration could lead to further additions in loss reserves which will increase the possibility that FGIC could become subjected to some form of regulatory intervention.
Moreover, as of March 31, 2008 FGIC would have negative statutory capital if not for the $600 million 'contingent gain' the company recognized related to a structured finance CDO (SF CDO) transaction, known as Havenrock II, that is currently being disputed in court. Fitch continues to monitor developments with respect to this dispute for potential implications to the financial condition of FGIC.
In the event that some form of regulatory intervention were to occur, FGIC's exposure to credit derivatives (CDS) would be subject to immediate termination with its outstanding counterparties. In this scenario, FGIC would be required to settle the CDS contracts at their current market value; a level that Fitch believes is considerably greater than the company's existing claims-paying resources.
Given the heightened risk of regulatory intervention, and FGIC's inability to date to raise additional third-party capital, either from its existing owners or externally, it is likely the company will need to pursue the commutation of some of its most capital intensive exposures, namely SF CDOs underwritten in CDS form. Such options are more likely given the precedent set by the recently announced commutation of several SF CDO contracts between Security Capital Assurance Ltd. and Merrill Lynch & Co., Inc.
The Rating Watch Evolving reflects:
-- The uncertainty noted above related to the outcome of the Havenrock II dispute, and the potential for either favorable or negative outcomes;
-- Fitch's expectation for higher RMBS loss reserves in the next several quarters;
-- Ongoing negotiations with external reinsurance providers that could ultimately improve certain policyholder positions; and
-- Rating implications tied to Fitch's ultimate viewpoint related to the nature of the negotiations surrounding probable commutations. Given FGIC's greatly weakened financial condition, Fitch would evaluate any commutation to judge whether it was 'distressed' and viewed as an economic default per Fitch's rating methodology.
The Rating Watch Negative on FGIC Corp.'s long-term issuer and senior unsecured debt ratings reflects Fitch's expectation that if FGIC's financial condition continues to deteriorate and triggers some form of regulatory intervention, regulators will likely prevent FGIC from paying dividends to FGIC Corp. in order to service its debt or other holding company operating expenses.
Fitch will comment on the impact of the downgrade of FGIC's IFS rating on the ratings of securities insured by FGIC in a separate release.
FGIC Corp. is a U.S. holding company whose primary operating financial guaranty subsidiaries are FGIC and FGIC U.K Ltd. For March 31, 2008, FGIC Corp. reported consolidated assets under Generally Accepted Accounting Principles of $6.7 billion and shareholders' equity of approximately $548 million. On an aggregated basis, net par outstanding for FGIC totaled $308 billion as of March 31, 2008.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Ralph R. Aurora, +1-212-908-0528
Thomas J. Abruzzo, +1-212-908-0793
Sandro Scenga, +1-212-908-0278 (Media Relations)
