On 14 November Assured Guaranty Ltd.’s (AGL) proposed acquisition of the financial guaranty business of Financial Security Assurance Holdings Ltd. (FSA). In connection with this possible event Fitch comments about likely outcome for CDS involving FSA, particularly the potential for the acquisition to trigger a ‘succession event’ in CDS that reference obligations of FSA and its subsidiaries.
It’s significant to find out how the acquisition transaction will change FSA’s current corporate and debt structure. To analyse this process obligations of FSA and its subsidiaries can qualitatively be divided into several categories:
– Outstanding insured obligations of Financial Security Assurance Inc. (FSA Inc.) – the primary financial guaranty entity. FSA Inc.’s insured portfolio on a gross par basis as of Sept. 30, 2008 totaled $548 billion, and the majority was insured via financial guaranty policies, rather than CDS. FSA Inc. has no outstanding public debt.
– Outstanding direct debt of FSA – the current holding company. As of 30 September 2008, FSA reported outstanding direct debt of $730 million.
– Outstanding obligations of FSA’s financial services business subsidiaries and affiliates. These obligations are primarily either ‘guaranteed investment contracts’ (GICs) or medium term notes (MTNs). The GIC obligations are issued by subsidiaries of FSA, and the MTNs are issued by partially owned affiliates of FSA. Both the GIC obligations and the MTNs are insured by FSA Inc.
At closing and for some period afterward, FSA Inc. is expected to remain a separate legal entity, and continue its current public finance and infrastructure business activities as a standalone financial guarantor. This being the case, Fitch does not expect that the acquisition transaction would constitute a ‘succession event’ at this time for CDS referencing obligations of FSA Inc.
Today it’s difficult to define future of the holding company, FSA. AGL has indicated there is a possibility that FSA will be merged into AGL’s U.S. holding company subsidiary. Whether or not FSA is merged into an AGL entity, its currently outstanding debt is expected to remain outstanding, possibly with a guarantee by AGL. If FSA is merged into an AGL entity, it is likely this would constitute a ‘succession event’ for CDS written on FSA. If FSA continues as a separate legal entity with its current debt structure, Fitch expects that the acquisition would not trigger a ‘succession event.’
The structure of the transaction contemplates that FSA Inc. will remain the insurer of the financial products obligations, and in any event, these obligations as a percentage of FSA Inc.’s total are of insufficient magnitude to breach the stipulated 25% threshold to potentially qualify as a succession event.
Fitch doesn’t consider the assumption of these obligations by Dexia to trigger a succession event for FSA Inc. as the guarantor.
L.D.