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Troubled bond insurer FGIC Corp. is still just inching forward with plans to raise new capital. Facing pressure from the New York State Insurance Department to formalize plans to deal with future losses on structured finance products, FGIC said last week that it received proposals from strategic partners, reinsurers and private equity firms and expects to formalize a proposal within weeks. "We are encouraged to see the high degree of interest that has been expressed in FGIC," the company said in a statement. The update followed FGIC's announcement in mid-April that it had hired Goldman, Sachs & Co. to explore a sale of all or parts of the company or consider a reinsurance transaction. Another option was to split up its stable municipal bond business from its structured finance book to protect the muni business. The moves by New York-based FGIC come long after its two biggest rivals, MBIA Inc. and Ambac Financial Group Inc., the No. 1 and No. 2 monolines, respectively, secured capital to maintain their triple-A ratings. MBIA raised $2.6 billion in three steps this winter, including $800 million from Warburg Pincus, and Ambac on March 7 raised $1.5 billion through a stock and convertible securities offering. Neither the form nor the size of the capital injection are clear yet for FGIC, parent of bond insurer Financial Guaranty Insurance Co. and the fourth-largest monoline in the U.S. But FGIC's position is more precarious than that of its bigger competitors. Standard & Poor's cut FGIC's credit rating in March to BB junk status and Moody's Investors Service rates it just a notch or two above junk. Without investment-grade ratings, FGIC cannot write new business. FGIC chief risk officer John Dubel was unavailable for comment. "They grew too fast, ate up all of their excess capital and made poor credit decisions by writing [credit default swaps] of [asset-backed securities]," says Mark Lane, an analyst with William Blair & Co. LLC. A dangerously high portion of FGIC's business came from risky structured finance deals. Bob Green, director with S&P's bond insurance ratings group, says 66.6% of the mortgage-backed products FGIC insured in 2005, 2006 and 2007 were rated at the lowest investment grade of triple-B, compared with 54.8% for MBIA, 56.1% for Ambac and 31.7% at Financial Security Assurance Holdings Ltd., the No. 3 monoline. Compounding matters, FGIC had the smallest capital base among triple-A-rated monolines going into the subprime meltdown, Green says. FGIC's capital cushion of $2.7 billion is roughly $2 billion shy of the $4.8 billion it needs to cover projected losses on structured finance products, S&P estimated in February. While the company does not yet face a liquidity crisis, CEO Frank Bivona has to lay plans for what could be huge losses on arcane debt products it insured. The problems appear to stem in part from the purchase of the company in 2003 by mortgage insurer PMI Group Inc., Blackstone Group LP, Cypress Group LLC and CIVC Partners LP from GE Capital Corp. in December 2003. PMI has the biggest stake, at 42%. "The owners' position was to operate with the smallest amount of capital it could at a triple-A level in order to show accelerated actions on equity improvement," Green says. Before the buyout, FGIC had focused on municipal bonds, but the new owners pushed into areas such as collateralized debt obligations and Mexican residential mortgage-backed securities, according to an S&P report. Because FGIC was not public, it was more difficult to turn to the public markets, William Blair's Lane says, and PMI has said it "does not intend to make further capital contributions to its financial guaranty investments." PMI shares slid 4%, to $5.98, on May 5, when FGIC said it was still weighing proposals, and fell a further 3%, to about $5.79, on May 8. Lane doubts FGIC can pull off a good book-back book split. Regulators would likely block that because it would leave the structured finance side of the business very vulnerable, he says. A spokesman for the New York State Insurance Department declined to comment. Lane thinks a simple sale or recapitalization is also unlikely. "I don't understand how anyone would put money in them as an ongoing entity," he says. -- Michael Rudnick See The Deal newsweekly CategoriesPrivate capital video
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