S&P Gives Thumbs Down To FGIC Plan To Split

A rating firm today gave a negative evaluation to a Financial Guaranty Insurance Company plan to divide the firm into two separate operations, with municipal bond business in one unit and riskier offerings in another.

Standard & Poor's Ratings Services said it is putting the FGIC "A" rating and the FGIC Corp. holding company rated "BBB" on CreditWatch with negative implications.

S&P said it also acted based on statements from the major stakeholder in FGIC

S&P had previously put FGIC on CreditWatch with developing implications.

S&P noted that FGIC's principal owner, The PMI Group, recently announced that it no longer views FGIC as a strategic investment, and will not be contributing capital as part of any recapitalization plan.

It added that, while FGIC's ability to write new business was already severely constrained, the company formally announced a suspension of new business writings in order to preserve capital.

S&P said it believes the announcements negatively affect the company's ability to implement plans to raise additional capital and resume writing business.

The rating firm, considering FGIC's business position and its ability to write new business, noted that the company said last month it would apply to the New York State Insurance Department for a new license.

FGIC has said this new license could be used in connection with the establishment of an affiliated new company that would principally be involved in the insurance of municipal business.

According to FGIC's plan, structured finance business and possibly some other sectors would remain as insured obligations of FGIC.

S&P said FGIC management believes the creation of this municipally focused company is central to its ability to raise capital to generate new business, and said the revision to CreditWatch Negative "reflects our belief that, in terms of both capitalization and ability to write new business, prospects for the currently existing legal entity (FGIC) under this split-company plan are negative."

Should the split-company plan not succeed, FGIC's ability to raise capital and resume writing new business would be less likely, S&P concluded.

S&P said that under either scenario, prospects for a rating upgrade for FGIC are difficult to envision.

S&P said it will monitor developments as this plan moves ahead and update its ratings accordingly.