Monoline Bond Insurer Split May be Only Viable Option
Splitting off the risky structured finance portion of monoline insurers’ portfolios from the more stable municipal bond guarantee business may be the only viable option for restoring the industry’s financial health, CreditSights says.
In its analysis of the latest scenarios under consideration, CreditSights says momentum has shifted in favor of the “good bank bad bank scenario.”
While a split could well leave holders of structured wraps at a distinct disadvantage, it may be the only viable solution for the companies to keep, or regain, the AAA insurance financial strength ratings of their municipal insurance business.
CreditSights believes recent regulatory comments indicate that insurance law could be amended to accommodate a split. Without the benefit of a good/bad bank playbook to refer to for the monolines, the Mellon Bank split of the late 1980’s could serve as a potential roadmap. “While the bad bank insurance subsidiary would likely experience downgrades, increased capital levels could be sufficient to meet potential losses even in stressed situations, depending upon the rating agency capital requirements for a pure municipal business,” CreditSights says in Monoline Monitor: Potential Mechanics of a Split.
MBIA (NYSE: MBI) and FGIC (NYSE: PMI ) have already announced plans to split their municipal and structured businesses. On Friday it was reported that Ambac (NYSE: ABK) may get as much as $3 billion as part of a bailout agreement from a consortium of banks. “The details remain sketchy but we suspect that the capital injection could come in conjunction with plans to split Ambac’s insurance operating subsidiaries. ”
Barring a split, we believe that the capital injection would be insufficient for Ambac’s operating subsidiary to maintain a AAA insurance financial strength rating.
While the mechanics of a split up are fraught with uncertainties, including the potential for structured product holders to sue for fraudulent conveyance, the New York State Insurance regulators have voiced support for a split of the monolines municipal and structured books of business.
CreditSights is skeptical of the plan proposed by industry critic and short-seller Bill Ackman of Pershing Square Capital. “The plan would essentially layer in the troubled structured business between the holding company creditors and the municipal business, further distancing holding company creditors from the healthy municipal business and paying Ackman a nice return on his CDS position.”
In our opinion, the likelihood that the monolines and their regulators will seriously consider Ackman’s plan is extremely remote.
Meanwhile Standard & Poor’s issued Detailed Results Of Subprime Stress Test Of Financial Guarantors. S&P said it “developed a set of net cumulative loss assumptions by asset type and vintage that we believe will likely turn out to be no less than, and perhaps higher than, the ultimate loss levels experienced.
As such, save for the possibility of materially adverse asset class performance beyond our current expectations, we view this stress test as one that will retain its relevance over time.
As a result, S&P affirmed the ratings of MBIA and Ambac and said MBIA was no longer on watch for a downgrade. However, Ambac is still at risk dependng on the outcome of the rescue efforts.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.