Rating Agency Eyes the Implications of MGIC/Radian Deal's End

In the wake of the collapse of the merger agreement Radian Group Inc. here had with MGIC Investment Corp., Milwaukee, Fitch Ratings has downgraded Radian and gave it a negative rating outlook.

The two parties called off their merger, citing the challenging environment in the mortgage business. But while the parting is on the face amicable, the activity in the weeks leading up to the point was contentious.

It started when it was revealed by both companies that their individual investments in C-BASS were now worthless. That led MGIC to issue an announcement stating it was not obligated to complete the deal because that represented a material change.

Radian disagreed with MGIC's assessment. Eventually MGIC filed suit in Federal District Court in Milwaukee. That case as well as any other litigation between the parties will be dismissed as a result of the new agreement.

The Fitch downgrade cuts the long-term debt ratings of Radian to "A-" from "A" and the insurer financial strength ratings of all of Radian's mortgage insurance subsidiaries to "AA-" from "AA."

When the problems with C-BASS first emerged and the deal began to look shaky, Fitch on two occasions said it viewed Radian's financial position on a standalone basis to be relatively weakened by recent market developments.

"While the current market conditions in the mortgage insurance sector will remain very challenged, Fitch believes Radian's mortgage insurance subsidiaries currently maintain ample capital resources to support its book of business at an 'AA-' rating level. This assessment factors in the recent revisions made by Fitch to its proprietary mortgage insurance capital model, combined with a full haircut to the risk-in-force exposure of Radian's higher-risk structured mortgage insurance exposures supported by second-lien and net interest margin securitizations," the rating agency said.

The negative outlook, it added, was a reflection of "the operational challenges likely to be faced by the company as a standalone entity, combined with the increased operational leverage that is currently being supported at the holding company level with the drawdown of $200 million from a committed bank facility that was announced in August."

Meanwhile, Fitch affirmed MGIC's "AA" insurer financial strength rating.

It said that while "general conditions in the market combined with the expected $516 million impairment of its C-BASS investment have reduced the financial strength of MGIC compared to its historical norms, Fitch still believes the company is in a good position to operate at its current rating level as a standalone company."

In the joint statement, S.A. Ibrahim, chief executive of Radian, said, "Our mutual decision to terminate the pending merger represents the best outcome for both companies under the circumstances."

In a separate release issued by Radian, Mr. Ibrahim commented, "We have thoroughly reviewed our businesses and are confident that as a standalone company we can deliver on our strategic plan to create long-term value for Radian and our stockholders. While there are significant credit challenges in today's mortgage market, we also believe that there are tremendous opportunities for our company in the mortgage insurance and financial guaranty markets, and our management team is moving aggressively to position Radian for future success."

The deal had contemplated MGIC paying one share of its common stock for every 0.9658 shares of Radian. On Feb. 6, 2007, the day the deal was announced, Radian closed at $66.51 and MGIC at $68.48. But between the mortgage industry troubles and the specific issues regarding C-BASS, MGIC closed at $30.05 and Radian at $18.27 on Sept. 5, the day the deal was cancelled. (c) 2007 National Mortgage News and SourceMedia, Inc. All Rights Reserved. http://www.nationalmortgagenews.com http://www.sourcemedia.com