Bond Insurer CIFG Gets $1.5 Billion Lifeline; Others Likely to Follow

Financial guarantor CIFG Holding announced Thursday it will receive a $1.5 billion capital injection -- effectively doubling its capital -- from the controlling shareholders of Natixis, a French investment bank, in order to protect its triple-A credit rating. A month ago, Fitch cited CIFG and much-larger FGIC as "the most likely to experience contraction in their capital cushions," a condition that could precipitate a downgrade. If bond insurers were to lose their AAA ratings, a domino effect could ensue with downgrades on the hundreds of billions of dollars' worth of debt securities they guarantee. Ultimately, bond investors like mutual-fund holders and retirees would be hurt. As of October 5, CIFG's direct exposure to residential mortgage-backed securities was $1.9 billion, most backed by subprime mortgages, plus another $9.2 billion in CDOs. Fitch confirmed that the capital infusion will permit it to reaffirm CIFG's rating. Natixis's rescue plan offers what may become a "road map" for other bond insurers, including FGIC -- in which PMI group has a 42% stake, Blackstone holds a 23% stake, and former owner GE retains a 5% stake -- Ambac, MBIA and Security Capital Assurance. FGIC, which insures $315 billion in bonds, including $30B in mortgage-backed bonds and $25B in CDOs, has at most three weeks to retain its AAA rating. "They'll do whatever is necessary to protect their ratings and their franchise," Fitch Ratings' Thomas Abruzzo said of the group. "What Natixis has done makes an awful lot of sense," said Karl Bergqwist of Gartmore Investment Management plc. "There is systemic incentive to ensure that large monoline insurers don't get downgraded and don't go bust."

Sources: Wall Street Journal, TheStreet.com, Bloomberg I, II
Commentary: A Long/Short Play on Monoline Insurers • MBIA, Ambac and Pandora's Box • Monoline Insurers: More Trouble Ahead
Stocks to watch: PMI, BX, GE, ABK, MBI, SCA

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