2008-09-03 23:50:04 -
- If CIFG Holding, Ltd (CIFG) is successful in executing various commutations as part of a non-binding Memorandum of Understanding (MOU) (as announced yesterday), this would be a meaningfully positive development for the company's credit profile, according to Fitch Ratings. However, given the significant execution risk of these transactions, Fitch believes no rating action is appropriate at this time.
Fitch currently rates the financial guaranty insurance subsidiaries of CIFG Holdings as follows:
CIFG Guaranty
CIFG Assurance North America, Inc.
CIFG Europe
--IFS 'CCC';
--Rating Watch Evolving.
On Sept. 2, 2008, CIFG and its financial guaranty subsidiaries, announced that it, along with its principal shareholders, Banque Federale des Banques Populaires and Caisse Nationale des Caisses d'Espargne et Prevoyance, have entered into a non-binding MOU with the credit default swap (CDS) counterparties and insured bondholders of the bulk of its most troubled structured finance collateralized debt obligations (SF CDOs) as well as certain specified commercial real estate (CRE) CDOs, aimed at potentially commuting these exposures. As part of the MOU, CIFG will seek to cede the bulk of its U.S. public finance portfolio to a high quality reinsurance provider.
Upon closing of the transactions contemplated in the non-binding MOU, CIFG expects to commute about $12 billion in SF CDO and CRE CDO exposures. In return, CIFG expects to pay the counterparties cash and a substantial equity position in CIFG Holdings. Execution of the MOU, which would include participation by a number of counterparties who have not yet signed the MOU, is contingent upon all of CIFG's SF CDO counterparties commuting their exposures. Additionally, as part of the MOU, CIFG Holdings will attempt to cede its U.S. public finance portfolio to a high quality reinsurance provider. Closing of these transactions is also subject to a number of other conditions, including any required approvals from Bermuda, New York and French regulators.
CIFG's current IFS ratings reflect both Fitch's view that absent the commutation, the company is in a very weak financial condition, as well as indications provided by CIFG's current shareholders that no additional capital support will be made available to CIFG. Fitch believes adverse loss development on SF CDO's during 2008 has caused the company's consolidated statutory capital to become negative. Furthermore, Fitch is concerned that in future periods, CIFG may need to increase consolidated loss reserves over and above those taken to-date on SF CDOs.
Successful completion of the commutation transaction would eliminate the uncertainty of future losses, allow CIFG Holdings to release some of the loss reserves taken to-date and would be accretive to the company's capital position. In addition, the reinsurance transaction would significantly benefit affected policy-holders and the successful close of the contemplated transactions would leave an insured portfolio that would be largely comprised of pooled corporate, international infrastructure and certain capacity constrained U.S. public finance exposures that are generally viewed by Fitch as being of good credit quality.
The Rating Watch Evolving status on CIFG reflects the uncertainty surrounding ongoing negotiations with external reinsurance providers and insured transaction counterparties that are in preliminary and non-binding stages.
Once a definitive agreement is in place, Fitch expects to assess CIFG's post-commutation credit profile, including the factors noted above. As a result, on a go-forward basis the IFS ratings could be upgraded.
Prior to any upgrades post-commutation, however, Fitch would evaluate the transaction to judge whether it constitutes a 'distressed' exchange and therefore a default per Fitch's rating methodology given CIFG's weakened financial condition. Largely a technical matter, if Fitch concluded that the contemplated commutation was distressed, the Agency would likely downgrade CIFG's IFS rating to a level indicating a default had occurred prior to assigning a higher rating to the restructured entity if believed warranted by Fitch.
CIFG Guaranty, CIFG Assurance North America, Inc. and CIFG Europe are subsidiaries of CIFG Holding. CIFG Holding is directly owned by Banque Federale des Banques Populaires and Caisse Nationale des Caisses d'Epargne et Prevoyance, two large French banking groups.
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
Roger Merritt, +1-212-908-0636
George Masek, +1-212-908-0617
Sandro Scenga, +1-212-908-0278 (Media Relations)
Hannah Warrington, +44 (0) 207 417 6298
(Media Relations, London)
