NU Online News Service, June 13, 2:41 p.m.EDT

New York State's move to place Financial Guaranty Insurance Co.into rehabilitation does not necessarily mean the end is near forthe bond insurer, but it faces a difficult road ahead says oneindustry expert.

On Monday, FGIC issued a statement that Benjamin M. Lawsky,Superintendent of the New York State Department of FinancialServices, filed papers in New York State Supreme Court in Manhattanrequesting the insurer be placed in rehabilitation.

Thepetition says FGIC voluntarily consented to be placed intorehabilitation.

The court will hold a hearing on June 28 to consider thepetition by the department, at which time the court may grant therequest unless there are objections.

FGIC entered into Chapter 11 Bankruptcy protection in 2010 after a series ofquarterly losses due to its insuring of residential mortgage-backedsecurities from 2005 through 2007.

The company ceased writing financial guaranty insurance policiesin 2008, and in 2009 it reported a deficit in policyholders'surplus of approximately $866 million, according to the FGICRehabilitation website.

That same year, the department ordered FGIC to stop payingclaims.

Subsequently, FGIC has been unable to eliminate the impairment,prompting the Financial Services Department to place the insurer inrehabilitation.

According to the FGIC Rehabilitation website, the order ofrehabilitation is not a death knell for the company. In fact, thesite says that the order does not mean the company will go intoliquidation and that several steps can be taken—including therestructuring of insurance policies, sales of assets or a merger—tosolve the solvency issue.

Asked about the company's chances of coming out ofrehabilitation, Charlie Ruoff, president of CR Market Strategies inNew York, a consulting firm, says it depends on FGIC's financialposition and its ability to find a market going forward.

While he knows of one company that successfully came out ofrehabilitation a few years ago in New York (Interborocame out of rehabilitation about five years ago), that was apersonal-lines company with a market to return to.

He says even if the department is able to sort through thefinancial issues and bring it back, the market for guarantyinsurance is out of the mainstream and is difficult to getinto.

He says the municipal bond market is not as active as it wasyears ago because sponsors are finding that there is no advantageto having insurance on the bonds. Insurance is not improving therating position of the municipal bonds, and is just adding coststhat investors are not interested in paying. For an "A" rated bondor higher, he says insurance is not required.

"I think the idea here is the preservation of assets for thepurpose of taking care of the liabilities, and the potential forrehabilitation…I don't hold much of an outlook for that because Idon't know what getting back into that marketplace really means,"says Ruoff.

"There is not much of a marketplace left for financial guarantyinsurers the way we are currently going," he adds.

It would be good to get the insurer back into shape, adds Ruoff,because the New York state guaranty fund does not cover bondinsurance.

For policyholders, they have to wait and see "what cents on thedollar they will get from the rehabilitation effort," Ruoffnotes.