Assured Guaranty Closes Deal To Buy FSA

By: Dr. Jay H. Abrams
Chief Municipal Credit Analyst

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Assured Guaranty, one of the few bond insurers still active in the municipal bond industry, has completed its acquisition of former rival, Financial Security Assurance.

The cash and stock transaction closed July 1. Both Assured and FSA are rated “AAA” by Standard & Poor’s, and hold ratings in the “AA” or equivalent category by both Moody’s and Fitch. The two companies will continue to operate separately under the parentage of Assured. Claims paying ability of the combined companies (including affiliated re-insurers) is approximately $12.5 billion, according to Assured.

In a statement announcing completion of the deal, Assured Guaranty Ltd., Assured’s parent, indicated that FSA will continue to insure municipal bond debt exclusively, while Assured Guaranty Corp. will insure structured finance transactions as well as traditional public infrastructure projects.

S&P reaffirms ratings

S&P formally reaffirmed both companies’ ratings noting the strong capital adequacy of each unit and their strong margins of safety. S&P also noted that FSA still retains some exposure to its former parent, Dexia, S.A., and the investment contract business FSA left behind. As a result, both Assured and FSA will carry a Negative Outlook until such exposure is mitigated, likely in 2011.

Assured is now in a position of dominance in the municipal bond industry. The only other insurer to carry an “AAA” rating is Berkshire Hathaway Assurance Corp. (BHAC), a unit of Warren Buffet’s Berkshire Hathaway. BHAC, however, insures few bonds and has a market share under 3%.

Companies dominate market

According to The Bond Buyer, through May 31, 2009, insured transactions accounted for 12.5% of total new bond issues, down from the 50% levels prior to the sub-prime real estate crisis. Multiple rating downgrades experienced by the bond insurance industry have essentially left Assured and FSA in command of the insured portion of the new issuance market, with an estimated 70% market share.

The final purchase price was $546 million in cash plus 22.3 million share of stock (valued at $276.1 million at close of trading on July1). FSA employs 360 people, Assured has 160 on its staff.

7/3/2009