FGIC could be first to split

The monoline insurer Financial Guaranty Insurance Company (FGIC) might be the first to split its municipal bond business from its troubled structured credit arm.

FGIC Corporation, the parent company of FGIC, announced on April 14 that it has appointed Goldman Sachs to advise it on various strategic proposals. Sources suggest that primary among those proposals is a spin-off of the municipal bond portfolio, with additional capital raised to regain a AAA rating for that side of the business.

The company had until last year provided credit default swap insurance contracts for the most senior parts of the capital structure in collateralised debt obligations of asset-backed securities (CDOs of ABSs), as well as credit default swaps of residential mortgage-backed securities. Unlike the municipal bond side of the business, which could now be siphoned off into a new entity, that side has suffered severely from the credit crunch and more specifically the high default rates in the subprime ABS sector in the US.

"With a high quality and diversified portfolio, coupled with a focused business strategy, the new company would have a unique platform to deliver superior value to its clients and investors in the securites it insures," said the company in a statement issued on April 14.

The municipal bond business currently stands at a $230 billion portfolio of highly rated assets. FGIC was recently downgraded to Baa3 by Moody's.

FGIC filed a lawsuit against IKB Deutsche Industriebank, its asset management arm and Calyon on March 10 this year. The lawsuit revolves around its obligations under the Havenrock II CDO, which transferred assets from the bank's Rhineland Funding. The monoline is seeking to terminate that agreement, which accounts for 75% of its writedowns of CDO of ABS liabilities by the end of last year, due to the fact that IKB had misrepresented its financial strength at the time of the transaction.

Risk will be running a feature analysing this and other monoline lawsuits in the next issue.

See also:Two monolines face legal action
http://www.risk.net/public/showPage.html?page=743108">Moody's caves in on muni bond ratings