Assured Guaranty Corp. announced Wednesday it would begin the process that eventually should lead to it directly guaranteeing bond insurance policies originally issued by the now-defunct CIFG Assurance North America.
Assured entered into an agreement with CIFG in January 2009 to reinsure most of CIFG’s public finance portfolio — now about $11.1 billion of investment-grade bonds. Assured now administers that portfolio but any claims are paid by CIFG, which is then reimbursed by Assured.
The novation of policies would take CIFG out of the equation entirely, replacing the CIFG guarantee with Assured’s. That could increase the credit ratings on the wrapped bonds.
Credit agencies have withdrawn their junk ratings on CIFG, while Assured boasts double-A grades from both Moody’s Investors Service and Standard & Poor’s.
“The novation, if successful, will provide bondholders with AGC’s direct guaranty of their bonds,” Assured said a press release.
Assured already provides full reinsurance for the covered policies but CIFG “remains the insurer until the policies are novated, and the bondholder remains subject to credit risk of CIFG,” the release said.
Assured and CIFG will first seek consent for novation on bonds insured in the primary market. CIFG is sending consent forms to bond trustees or, if there is no trustee, to the issuer of the bonds, who must return a certificate of consent.
The offer to novate a particular policy will be open through July 15.
Bonds insured in secondary markets will be taken care of in phase two of the novation. CIFG will be sending requests for consents to the custodian.
“Once CIFG receives the required certificate of consent for a given policy, AGC will become the insurer of the bond,” the press release said. “CIFG will be released from its obligations under the policy and related documents.”
All other terms of the policy will remain unchanged. Roughly 1,170 covered policies are eligible for novation. Details are at:
One deal not part of the transaction: $83.3 million of bonds from Iowa’s Xenia Water District.
The two bond guarantors dispute who is ultimately responsible for claims on the bonds. The debt was rated above investment grade when the reinsurance agreement was struck, but Xenia had earlier dipped into its reserve fund to make debt payments and was later downgraded to junk.
Assured says Xenia is thus excluded from the reinsurance transaction. CIFG continues to honor claims to Xenia bondholders but it is battling Assured in court over reinsurance payments.
