NEW YORK – MBIA Inc. on Wednesday agreed to take control of nearly $200 billion of municipal bonds currently backed by FGIC Corp. in a move that could help its weaker rival avoid bankruptcy.
The agreement between the two bond insurers calls for the municipal bond issuers to pay their premiums in advance, transferring $741 million to MBIA. In exchange, MBIA will pay FGIC a commission worth nearly $200 million.
New York Insurance Superintendent Eric Dinallo put the deal together as part of a wider plan to help the $2.4 trillion bond insurance industry regain its financial health. Insurers like FGIC has been hurt this year by losses and downgrades linked to the broader credit crisis.
Dinallo told reporters on a conference call that this deal could “dramatically change” the potential of FGIC becoming insolvent, and also offers MBIA a way to expand its municipal bond practice.
FGIC has been downgraded to junk status by major credit rating agencies, which makes it more expensive for the company to borrow money and operate. However, Dinallo expects the municipal bonds reinsured under the agreement would be rated at MBIA's current double-A.
“This is the third-largest writer of municipal bond insurance, and it's been reduced to junk status,” Dinallo said. “And now, ostensibly, we assume and hope that it's being upgraded to MBIA's rating. The synergy in turn will help MBIA because the agreement is bringing them a tremendous capital base.”
In February, billionaire investor Warren Buffett said he offered to reinsure some $800 billion worth of municipal bonds guaranteed by MBIA, Ambac Financial Group and FGIC. His investment vehicle, Berkshire Hathaway, proposed that it would invest to $5 billion as capital for the plan.
However, all three insurers rejected the plan.
Reinsurance is a type of insurance covering losses on other insurers' policies.
“As we discussed in a recent letter to owners, one of our strategies is to pursue opportunities that support the bond insurance market as a whole,” said Bill Fallon, MBIA managing director, in a statement. “This transaction will provide substantial benefits to the policyholders of FGIC, who can now rely on MBIA's financial strength, substantial claims-paying resources and established operating platform.”
The deal is expected to close in the third quarter, pending certain closing conditions.
As of June 30, FGIC had capital and surplus of $286 million and contingency reserves of $446 million. Total claims-paying resources as of June 30, were $5.2 billion, FGIC said.
FGIC, which is owned by Blackstone Group LP and PMI Group Inc., said in May it set aside $279.2 million to cover losses on its collateralized debt obligations, or CDOs, written in 2005, 2006 and 2007. The company said the reserves do not necessarily reflect the actual losses that will occur, and any real losses would take place over a period of years.
Shares of MBIA rose $1.28, or 11 percent, to $13.26 in after-hours trading after it closed up 9.7 percent at $11.98. Blackstone Group rose 16 cents to close at $17.08, and was unchanged in after-hours trading.
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AP Business Writer Sara Lepro contributed to this story from New York.
