Fidelity Taking Step Toward Spin Off of Title Insurance Division

While investors had a positive reaction when they first heard about Fidelity National Financial here spinning off its title business, at least one rating agency is taking a wait-and-see attitude.

Fidelity executives said they plan to offer 17.5% of a new Title Holding Co. to its current stockholders. FNF will retain the remaining portion of THC.

As part of the transaction, THC will be borrowing $500 million to pay a dividend to FNF prior to the spin-off. Furthermore, THC will issue a $250 million inter-company note that is payable to FNF. The terms of the note mirror those of a $250 million debenture issued by FNF when it acquired Chicago Title.

Fitch has placed FNF on rating watch negative, in part because of management's borrowing of money for this transaction, said analyst Peter Patrino. The move reflects increased financial leverage at both the title insurance level and the overall company level.

Fitch's statement said the rating agency "views FNF's ratings and the title operations segregated from information services to determine FNF-only leverage and coverage that is supportive of the current ratings. There is also consideration for overall financial leverage. While Fitch believes the partial spin-off of the title operations does not change this view, the concern primarily resides with the non-FIS entities increasing willingness to leverage the consolidated balance sheet."

Mr. Patrino said that after meeting with FNF, the future ratings decision would be based on management's plans regarding financial leverage on a consolidated basis and on a standalone title insurance basis.

The rating announcement added that if THC keeps financial leverage in the mid-20s or lower, assuming no material change in overall financial leverage, then the ratings are likely to be affirmed at their current level.

Investors seemed to like the deal. On May 16, the day before the announcement, FNF closed at $33.79 per share. The next day, it closed at $36.70.

In a conference call for the deal, William P. Foley II, said the goal is to get an "A minus" claims paying rating for THC.

FNF is also looking to reverse some recent opinions issued by the rating agencies, Mr. Foley said.

A reason for the spin-off is to allow FNF to pursue certain acquisitions. This includes looking at the mortgage insurance business, Mr. Foley said. The new structure at FNF makes pursuing a mortgage insurer "more interesting."

Furthermore, MI is an "excellent cross-sell" for a title insurer, he said.

He would later add that MI is countercyclical to title. Title insurers benefit from a high volume of refinancings. Because refis harm persistency, MI companies have their earnings negatively affected.

However, Mr. Foley, whose company is under scrutiny by the California insurance commissioner over its reinsurance arrangements, commented he does not like the reliance of the private mortgage insurers on captive reinsurance deals.

The specialty insurance line, currently operating as part of the title insurance business, will be split out and kept by FNF.

The transaction calls for FNF shareholders to get 0.175 shares of THC for every FNF share they own. THC will have the same dividend rate as FNF, $1 per share.

Mr. Foley will keep his jobs as chairman and chief executive of FNF, as well as become chairman of THC. The chief executive of THC will be Randy Quirk, FNF president.

Mr. Foley said, "We believe that it has been difficult to appreciate the full value of our distinct business lines in a single publicly traded security. Separating the businesses that comprise FNF into distinct companies will provide improved transparency for the investment community and a potentially simpler means of valuing the assets of FNF."

Fidelity is also parent of the nation's largest mortgage servicing automation platform. The company recently sold part of its stake in its information services unit.

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