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Fitch Places MGIC on Rating Watch Negative; Affirms Radian
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| Copyright: | Business Wire | | Source: | Business Wire | | Wordcount: | 932 |
Fitch Ratings has placed the 'AA+' insurer financial strength (IFS) ratings of Mortgage Guaranty Insurance Corporation (MGIC) and the 'A+' senior debt rating of MGIC Investment Corporation (MGIC Investment) on Rating Watch Negative as a result of the announced merger plan between MGIC Investment and The Radian Group Inc. (Radian). As a result of the announcement, Fitch also affirms the 'AA' IFS ratings of Radian Guaranty Inc. (Radian Guaranty), Radian Insurance Inc., Amerin Guaranty Corp. and Radian Europe Ltd. - the mortgage insurance subsidiaries of Radian. The Rating Outlook on Radian's mortgage insurance subsidiaries remains Stable. Fitch also affirms the 'AA' IFS ratings of Radian Asset Assurance Inc. (RAA) and subsidiary Radian Asset Assurance Ltd. (RAAL) - the financial guaranty subsidiaries of Radian. The Rating Outlook for RAA and RAAL remains Negative.
Given the competitive pressures impacting the mortgage insurance industry, Fitch believes the announced merger makes economic and strategic sense, and if consummated, the new entity will solidify its position as the premier mortgage insurer in the U.S. The combined MGIC-Radian Financial Group (MGIC-Radian) should benefit from an enhanced distribution platform in the mortgage insurance sector as well as efficiencies gained from greater economies of scale. MGIC-Radian is expected to conduct operations using the mortgage insurance platform of MGIC, the capital markets platform of Radian Guaranty and the financial guaranty platforms of RAA and RAAL. The current management team of each platform is expected to remain largely in place, providing on-going business continuity. MGIC-Radian will be led by Curt Culver, the current Chairman and CEO of MGIC, while S.A. Ibrahim, Radian's current CEO will become the combined entity's President and Chief Operating Officer.
That said, the combination of the two organizations will increase MGIC's risk profile relative to historical norms. Additionally, it is anticipated that excess cash flow generated at the holding company level either through increased dividends from its mortgage insurance subsidiaries or proceeds received from divestitures of current investments, will be distributed to MGIC-Radian's stockholders through share repurchases. Divestitures are expected to include the reduction in combined equity ownership of the two companies' stake in their financial services companies, Credit-Based Asset Servicing and Securitization (C-BASS) and Sherman Financial Group LLC (Sherman). Before consummation of the merger, Fitch expects that MGIC-Radian will reduce their combined ownership to less than 50% in both C-BASS and Sherman. Financially, MGIC-Radian anticipates lost earnings resulting from the reduced ownership in C-BASS and Sherman, will be offset by a lower level of outstanding capital.
Fitch believes there will be significant synergies realized from the proposed merger, including large expense savings, increased capital efficiency, and a better focused international expansion effort. Notwithstanding, Fitch recognizes significant execution risk in the proposed transaction; most notably the melding of two separate and distinct corporate cultures, as well as the reconciliation of any regulatory or customer objections.
The affirmation of the 'AA' IFS rating and Negative Rating Outlook for RAA continue to reflect the company's challenge to effectively grow a diverse and profitable book of business in the niche 'AA' sector of the financial guaranty industry. Under Matrix, Fitch's proprietary stochastic capital model for financial guarantors, RAA generated a Matrix result that was below the required minimum threshold necessary for a company to maintain an 'AA' IFS rating as of Mar. 31, 2006. Additionally, with respect to RAA's capital adequacy position, Fitch will closely monitor whether the combined MGIC-Radian will continue to be willing to provide financial support in the event it is needed to strengthen that entity's capital base. Analytically, Fitch assesses RAA's capital position on a stand-alone basis, given that there are currently no formal support arrangements active between the parent and RAA. As mentioned in Fitch's initial roll-out of Matrix on Jan. 9, 2007, the agency will provide a reasonable period to cure or improve individual company model results before any rating actions will be contemplated. For RAA, Fitch will be looking for a comprehensive capital enhancement plan from the company in the very near future that will demonstrate that the company will be effectively in compliance with Fitch's 'AA' ratings threshold by June 30, 2007.
Fitch has placed the following ratings on Rating Watch Negative:
MGIC Investment Corporation
--$200 million 6% senior notes due March 15, 2007 'A+';
--$200 million 5.625% senior notes due Sept. 15, 2011 'A+';
--$300 million 5.375% senior notes due Nov. 01, 2015 'A+'.
Mortgage Guaranty Insurance Corporation
--Insurer financial strength (IFS) 'AA+'.
Fitch has also affirmed the following ratings with a Stable Rating Outlook:
Radian Group Inc.
--$250 million 7.75% debentures due June 1, 2011 'A';
--$250 million 5.625% senior notes due Feb. 15, 2013 'A';
--$250 million 5.325% senior notes due Feb. 15, 2015 'A'.
Radian Guaranty Inc.
Radian Insurance Inc.
Amerin Guaranty Corp.
Radian Europe Ltd.
--Insurer financial strength (IFS) 'AA'
Additionally, Fitch affirms the following rating:
Market Street Custodial Trust I-III.
--$150 million money market committed preferred custodial trust securities 'A'.
Fitch has also affirmed the following ratings with a Negative Rating Outlook:
Radian Asset Assurance Inc.
Radian Asset Assurance Ltd.
--Insurer financial strength (IFS) 'AA'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
This is a news service of Thomson Business Intelligence Service ©2006. This content is for your personal use only, subject to Terms and Conditions. No redistribution allowed.
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