Fitch Affirms FGIC's 'AAA' IFS Rating Following Announced Sale by GECC

Fitch Ratings-New York-August 4, 2003: Fitch Ratings affirms Financial Guaranty Insurance Co.'s (FGIC) 'AAA' insurer financial strength (IFS) rating following the announcement by FGIC's parent company, General Electric Capital Corp. (GECC), of its intention to sell FGIC to a consortium of investors led by The PMI Group, Inc. (PMI, rated 'AA-', Rating Outlook Negative by Fitch), along with other private equity investors, for a total price of approximately $2.16 billion. Additionally, Fitch expects to rate the senior debt obligations of FGIC Corp., the parent company of FGIC, 'AA'. The Rating Outlook for FGIC and FGIC Corp. is Stable.

The investors in FGIC include:

  • PMI ($607.1 million of common equity, 42.2% common equity ownership);
  • Blackstone Capital Partners IV L.P. ($332.9 million of common equity, 23.1%);
  • Cypress Merchant Banking Partners II LP ($332.9 million of common equity, 23.1%);
  • CIVC Partners ($101.2 million of common equity, 7%); and,
  • GECC (4.5% common equity ownership, as well as $234.6 million of participating mandatorily convertible modified non-cumulative preferred stock [participating preferred stock]).

In addition, FGIC will have access to a $250 million, 364-day bridge facility from Banc of America Bridge LLC (a wholly-owned subsidiary of Banc of America Securities LLC), which is expected to be replaced with a public debt issuance by FGIC's newly established holding company soon after acquisition.

Fitch's affirmation reflects FGIC's well-established name within the financial guarantor industry, lowest-risk insured portfolio in the bond insurance industry, stable, albeit modest level of earnings, sufficient excess capital, and favorable current market conditions which has led to improved demand and pricing on new business. Concerns center on the reduced financial resources of the new investor group in comparison to GECC, a below average yield on FGIC's investment portfolio and a more aggressive growth strategy going forward.

At the time of sale, it is expected that at least $260 million of capital will be up-streamed to GECC from FGIC. After factoring in the dividend to GECC, Fitch believes FGIC maintains ample excess capital for the given ratings. This analysis took into account FGIC's remaining capital resources, factoring in the one-time dividend. No further dividends by FGIC are expected, with the exception of amounts necessary to fund the debt service needs of the newly established holding company. A conservative assumption of these future debt service needs was also included in Fitch's capital adequacy analysis.

In addition to its $234.6 million participating preferred stock and 4.5% common stock investment, GECC will also continue to provide a $300 million soft capital facility to FGIC. The facility, available to cover losses on municipal insured exposures subject to a $500 million deductible, provides additional claims-paying resources to FGIC. Despite these up-front commitments from GECC, the 50% of the Participating Preferred Stock is remarketable after the first anniversary and the remainder on the second anniversary, while the soft capital facility is expected to be replaced in the near future, with a favorable step-up in the deductible should it not be.

Over the last five years, GECC has taken a total of $725 million of capital out of FGIC, as a result of opportunities to deploy the capital elsewhere within GECC. These dividends have been paid to GECC, in part, through realized gains on assets within FGIC's investment portfolio. These dividends have somewhat reduced FGIC's excess capital position, and it also served to reduce the investment income yield on FGIC's remaining investment portfolio. On a percentage basis, FGIC's current investment income is well below its industry peers, and is expected to remain as such over the short- to medium-term.

Nevertheless, FGIC's remaining capital base, combined with the low risk portfolio which it currently insures, are consistent with Fitch's requirements for 'AAA' rated financial guarantors. In fact, available capital, future earned premiums and future investment income are expected to sustain FGIC's planned growth over the near term without need for external capital infusions.

Under new management, to be headed by Frank Bivona, formerly Vice Chairman and Chief Financial Officer of Ambac Financial Group, Inc., FGIC is expected to expand its presence within municipal finance and structured finance markets, and also enter the international bond markets - an area which FGIC has had only limited participation to date. While these sectors represent key areas of growth and increased profitability for FGIC, they are not without credit risk or execution risk. To these ends, FGIC has proposed a conservative business plan of expansion into these sectors, first focusing on established, high credit quality asset classes and capacity constrained names. At the same time, FGIC's established and well-recognized name within the financial guarantee market should alleviate some of the barriers to entry which have hindered, and may continue to hinder, other start-up financial guarantors. In combination with the proposed expansion, FGIC intends on hiring substantial analytical and administrative staff to support its growth.

Fitch will closely monitor the newly capitalized FGIC to ensure that its transformation progresses in line with its proposed business plans. While Fitch believes that FGIC's well-established industry presence should provide a platform to successfully penetrate the structured and international bond markets, hiring personnel with the requisite expertise and implementing these businesses could prove challenging. In addition, the interests of private equity investors could potentially translate into more aggressive return hurdles and/or overly-rapid expansion into new business lines than would otherwise be prudent.

As of March 31, 2003, FGIC had net par in force of $202.2 billion, supported by total claims-paying resources of $3.4 billion, including $2.2 billion of qualified statutory capital. FGIC's net par insured portfolio was comprised of 90.2% municipal finance exposure, 9.7% structured finance exposure and 0.1% international finance exposure. At the same reporting date, the market value of FGIC's investment portfolio totaled $3.09 billion, over 95% of which was rated 'AA-' or higher. Based in New York, NY, FGIC currently has approximately 100 employees.

The 'AA-' long-term issuer and senior debt ratings for PMI are also affirmed (see related press release available on the Fitch Ratings web site at 'www.fitchratings.com').

Contact: Thomas J. Abruzzo +1-212-908-0793 or Greg Stofega, CPA +1-212-908-0526, New York.

Media Relations: James Jockle +1-212-908-0547, New York.