Radian to Sell Bond-Insurer Unit to Assured for $810M

Radian Group Inc. agreed to sell its bond guarantor to Assured Guaranty Ltd. for $810 million to free up capital as the company prepares for tighter oversight of mortgage insurance.

The deal is expected to be completed in the first half of next year, Philadelphia-based Radian said in a statement today. The sale will help Chief Executive Officer S.A. Ibrahim focus on his company’s main business backing home loans after being burned by losses at Radian Asset Assurance, which covered structured securities like a collateralized loan obligation called Zohar.

Ibrahim is preparing Radian for the proposed private mortgage insurance eligibility requirements, or PMIERs, announced in July by the Federal Housing Finance Agency. Radian said then that the plan would create an $850 million shortfall and that the company would consider selling the unit to fill in the gap.

"The results of our valuation of Radian Asset indicate sufficient excess capital for Radian, even if the PMIERs are implemented as proposed," Compass Point Research & Trading LLC analysts led by Jason Stewart said in a report in September. The analysts predicted Radian Asset could be valued at $750 million to $1.2 billion.

Radian climbed 3.1% to $16.78 at 9:40 a.m. in New York trading, extending its gain for the year to 19%. Bermuda-based Assured Guaranty jumped 2.6% to $26.12 and is up 11% since Dec. 31.

The buyer expects the deal to increase earnings per share and operating shareholders' equity, CEO Dominic Frederico said in a separate statement. Sean Dargan and Tanmay Gupta, analysts at Macquarie Group Ltd., had speculated that Assured Guaranty could acquire the business.

With the Radian deal, Assured Guaranty "could put fallow capital in its insurance subsidiaries to work, generating more surplus and excess capital," the two analysts said earlier this month in a note.

The FHFA developed the new rules for private guarantors like Radian to be eligible to insure loans purchased by Fannie Mae and Freddie Mac. In addition to requiring companies to hold more capital against some insurance, the PMIERs proposal narrows the definition of available assets, which Radian said would have excluded its holding in the bond insurer.

The FHFA is seeking to avoid a repeat of the financial crisis, when the U.S. took over Fannie Mae and Freddie Mac and absorbed losses when some mortgage insurers were unable to honor their commitments. The policies cover costs when borrowers are unable to meet obligations and foreclosure fails to recover losses. The insurance is typically required when borrowers' down payments are less than 20% of a home's price.

Ibrahim has been scaling back Radian Asset for years as he seeks to simplify the company. The unit had $19.4 billion at risk as of Sept. 30, a decline of 83% from the middle of 2008. Radian said in August that it bought $100 million of default protection on an MBIA Inc. unit to help hedge against losses on the Zohar CLO backed by the two insurers.

"We are committed to streamlining our business and aligning our strategy toward the mortgage and real estate markets," Ibrahim said in Radian's statement. "This agreement marks an important milestone as we prepare for finalization of the proposed PMIERs in 2015. While we expect to fully comply, the sale of Radian Asset will help to accelerate our ability to do so."

Goldman Sachs Group Inc. advised the seller on the sale. Assured Guaranty used Bank of America Corp.'s Merrill Lynch and Mayer Brown LLP.

 

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