Billionaire investor Wilbur Ross has agreed to make up to a $1 billion investment in Bermuda-based bond insurer Assured Guaranty Ltd.
The bond insurer said Friday WL Ross & Co. will purchase $250 million worth of common stock and commit to buying an additional $750 million in shares at the company’s option. Assured shares rose 10 percent in premarket trading to $25 from a $22.78 close Thursday.
Bond insurers have struggled in recent months to maintain their critical “AAA” financial strength ratings, amid worries that rising mortgage delinquencies will lead to an unmanageable spike in defaults on bonds backed by the troubled loans.
In that case, insurers would be forced to pay principal and interest to cover claims. That fear of rising claims has forced insurers to either shore up their capital by raising money through new investments and reinsurance or face a downgrade from ratings agencies.
Ratings agencies have already downgraded some insurers, saying they do not have enough spare cash to cover a rise in claims, but Assured Guaranty has been seen as one of the strongest in the sector.
Bond insurers essentially need “AAA” ratings to book new business. Assured Guaranty carries “AAA” ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.
Assured Guaranty’s balance sheet has been strong enough that it is selling reinsurance — assuming other companies’ risk for a price — to other bond insurers. In December, Assured Guaranty’s reinsurance unit assumed $29 billion of Ambac Financial Group Inc.’s policies.
The closing of the initial $250 million investment by Ross is subject to regulatory approvals; any subsequent investments will require shareholder approval, which the company will request at its 2008 annual meeting.
As a condition of the investment, Ross will be appointed to Assured Guaranty’s board.
In order to draw on the $750 million commitment, Assured Guaranty must maintain “AAA” ratings for itself, and “AA” ratings for Assured Guaranty Re Ltd., the company’s reinsurance division, from credit ratings agencies.
The credit quality of its financial guaranty portfolio and investment portfolio also must not decline significantly.
Merrill Lynch & Co. acted as financial adviser to Assured.