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 for the bond insurer, but it faces a difficult road ahead says one industry expert.

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

The petition says FGIC voluntarily consented to be placed into rehabilitation.

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

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

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

That same year, the department ordered FGIC to stop paying claims.

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

According to the FGIC Rehabilitation website, the order of rehabilitation is not a death knell for the company. In fact, the site says that the order does not mean the company will go into liquidation and that several steps can be taken—including the restructuring of insurance policies, sales of assets or a merger—to solve the solvency issue.

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

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

He says even if the department is able to sort through the financial issues and bring it back, the market for guaranty insurance is out of the mainstream and is difficult to get into.

He says the municipal bond market is not as active as it was years ago because sponsors are finding that there is no advantage to having insurance on the bonds. Insurance is not improving the rating position of the municipal bonds, and is just adding costs that investors are not interested in paying. For an "A" rated bond or higher, he says insurance is not required.

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

"There is not much of a marketplace left for financial guaranty insurers 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 bond insurance.

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

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