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Monday March 3, 12:00 AM
Behind Ross' Bond-Insurance Bet |
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It's certainly not as cheap as his prior ventures into troubled industries, but Wilbur Ross' proposed $250 million investment in Assured Guaranty (AGO) could be just as lucrative if the wave of consolidation he expects in the financial guaranty sector materializes.
In a conversation with BusinessWeek on Feb. 29, the billionaire indicated that Assured could use the new capital to grow its business by re-insuring blocks of business from other industry players or through acquisitions.
It's more common for the investor in distressed companies to pounce when a target firm is already in or teetering on the brink of bankruptcy, when he can pick it up for a song. That's not the case with Assured, which has largely avoided the shaky portfolio investments that have plagued larger rivals MBIA Inc. (MBI) and Ambac Financial Group (ABK) in recent months.
On Feb. 29, Hamilton, Bermuda-based Assured said that W.L. Ross & Co. had signed an agreement to buy $250 million of common shares of the holding company and to commit to buy up to $750 million in additional stock sometime later if Assured so chooses.
Under the deal, Assured will sell its shares to the private equity firm at a price of $21.76 per share or 97% of the average closing price between Feb. 28 and March 3, whichever is higher. In addition, Assured has a one-year option that will allow it to sell the additional $750 million worth of equity to Ross's firm at no more than 17.5% of the current issuance price.
On Feb. 29, shares of Assured gained as much as 16% before slipping back to finish the session 12.6% higher at $25.65.
The deal comes as the broader financial guaranty sector is roiling with anxiety over whether the more embattled insurance names will be able to secure the capital they need to restructure their businesses in order to maintain their tenuous hold on triple-A credit ratings, which are required to continue to attract new business.
Ambac suffered another setback on Friday on reports that its restructuring plan is being held up by a disparity in how much money a consortium of banks is willing to invest in it and the amount of capital that ratings agencies require to maintain Ambac's triple-A rating. Separation of the municipal bond insurance business from the more troubled structured finance business would call for more capital because the company would be giving up the critical mass of the combined capital from both units, the ratings agencies are saying.
There had been speculation that Ross was considering investing at least $1.0 billion in Ambac, but "given Assured's strong market position as one of only two competitors in the primary guaranty market, and its stable AAA rating at each of the three rating agencies, the investment in Assured makes much more sense," analyst Andrew Wessel said in a research note for JPMorgan Chase & Co. on Feb. 29. [JPMorgan or its affiliates expect to receive or intend to seek compensation for investment banking services from Assured and Ambac within the next three months. It has done investment banking with Ambac and provided non-investment banking services for Assured within the past 12 months.]
Indeed, Ross told BusinessWeek that he prefers to play the role of beneficiary to a company that's starting from a position of strength and can use the money offensively to overtake its competitors rather than to a company that would use the cash defensively "simply to plug a hole."
Assured has "been growing rapidly because of the problems in the insurance industry. Hopefully, this capital is going to help them propel themselves to a new level and new standing within the industry," Ross said in a telephone interview. "They have relatively little exposure to the kind of securities that have caused trouble elsewhere."
That's why Assured's triple-A rating hasn't been called into question and why it's poised to consider doing large transactions, he added. In December, Assured reinsured a fairly large book of business that Ambac had, he said.
Whenever there's a crisis in an industry, it creates an opportunity for one of the moderate-sized players to move into the top rank as a result of the confusion around and crippling of competitors, Ross said.
Not that Assured has managed to escape the asset write-downs that have bedeviled all financial companies since the subprime debacle came into full focus last summer, but its exposure to high-risk securities is roughly one-third the size of those of its larger rivals, estimates Michael Grasher, an analyst at Piper Jaffray & Co. in Chicago.
Two weeks ago, Assured reported an after-tax unrealized mark-to-market loss on derivatives of $297.5 million, or $4.31 per share, which caused it to swing to a net loss of $3.77 per share in the fourth quarter from net income of 58 cents per share a year earlier.
For the full fiscal year 2007, Assured had an after-tax unrealized mark-to-market loss on derivatives of $480.0 million, or $7.06 per share, which was responsible for a net loss of $4.46 per share for the full year.
The deal with Assured won't prevent Ross from making efforts, together with Assured, to provide relief to some of the more distressed guarantors, Ross said. He's betting there will be stratification and consolidation of the industry and believes Assured because its credit rating isn't under threat and its capital position is fairly robust will be able to gain more market share in the industry.
"This is to help Assured improve its position relative to the industry, either by taking on other big blocks of reinsurance or by possibly making acquisitions," he explained.
Assured would get the quickest bang for its buck by using some of Ross' cash to reinsure blocks of business of other guarantors, which takes less time than going after new business, says Piper Jaffray's Grasher, who has a buy rating on the stock. [Piper Jaffray makes a market in the company's securities.]
Not only does the deal show the kind of growth potential that Assured has, but it would provide much-needed capacity to the financial guaranty industry, which could result in reinsurance transactions with some of the other guarantors and relieve their capital requirements, Grasher said.
In December, Assured Guaranty Re Ltd., the company's reinsurance unit, agreed to reinsure a $29 billion portfolio of financial guaranty contracts owned by Ambac.
JPMorgan's Wessel wrote in his note that he believes the deal with Wilbur Ross will be done at $24 per share, and predicted the additional $750 million in stock will be sold in the fourth quarter at $28.20, a 17.5% premium. He estimates the deal will boost Assured's book value by 20 cents per share to $21.60 in the first quarter of 2008.
Wessel expects the company's profits to jump 19% this year and despite the uptick in the share price on Friday, reaffirmed his overweight rating.
Ross has a reputation for rolling up distressed steel, coal and auto-parts companies and the deal with Assured could signal that he's on the prowl once again, this time looking to clean up in a key corner of the financial sector.
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