The Wall Street Journal-20080205-Dexia Moves to Boost Capital At Its Highflying Bond Insurer

Return to: The_Wall_Street_Journal-20080205

Dexia Moves to Boost Capital At Its Highflying Bond Insurer

Full Text (328  words)

Belgian-French bank Dexia moved to boost capital at its highflying bond insurer FSA yesterday, as it gains new business in the wake of ratings downgrades of the bond-issuance arms of rivals Ambac Financial Group Inc. and FGIC Corp.

The cash injection, totaling 340 million euros ($500 million), will help the unit meet soaring demand for FSA-insured bonds after its triple A ratings were confirmed by Fitch, Moody's and Standard & Poor's.

FSA is now considered the best monoline insurer and it needs extra capital to cope with the additional demand, said analyst Dirk Peeters, who covers Dexia stock for KBC Securities. "There is no one around to write any business so everyone is rushing to FSA," he said.

Bond insurers -- also known as monolines because they have just one line of business -- offer investors a way to recoup their money if their bonds fail.

With the advent of the subprime-mortgage crisis, some 20% of subprime loans have failed. As the mortgages incorporated within some bonds have defaulted, the bond insurers have had to step in and cover the payments with sometimes painful results.

Credit ratings agencies have now begun downgrading monolines from their triple A ratings, making it hard for them to write new business.

FSA's market share has more than doubled over recent months from between 22% and 25% before the subprime crisis to an expected 53% in the fourth quarter, Mr. Peeters said.

Despite the surging activity, some onlookers urged caution.

"There was already an expectation of a capital increase at FSA during the course of this year," said Jean-Pierre Lambert at Keefe, Bruyette & Woods Ltd.

"The $500 million increase in capital at FSA has been put forward in a positive light by Dexia, but it could well be that [fourth-quarter] comprehensive income was quite negative at FSA, leading to the need for a capital injection," he said.

FSA's earnings announcement on Feb. 12 should shed more light on this issue, he said.