Saturday, August 11, 2012

Ah Yes, Syncora

Many particulars and more importantly the entire statutory financial impact of Syncora's settlement with BofA should be evident in the next week when the company reports statutory results for Syncora Guaranty (SGI).

Based on recent RMBS recoveries at SGI, we expect that the announced $325M cash portion of the deal will result in more than $280M ending up with SGI while the rest flows to reinsurers and uninsured certificate holders. This number may overestimate the amount going to certificate holders due to the asset exchange, the still largely undisclosed portion of the deal.

Regardless, the cash numbers are impressive on their own and fall at the top of our previous range discussed here. We have continued to play with our spreadsheets for our own investments even while we were uninspired to write. Syncora's numbers haven't been changed for Q1 2012 but you can still get an idea of what is going on here.

All in, our rough estimate is for the cash portion of the deal to raise statutory surplus by $125M to $175M. Expected put-back recoveries from other counterparties may increase as well. There is no way to gauge the effects of the other remediation mentioned in Syncora's July 17th press release.

We speculate that the asset exchange portion of the deal will have a partially offsetting effect on surplus as surplus supporting assets were exchanged for interests that never reduced surplus. Syncora likely exchanged substantially all of their BofA insurance cash flow certificate and BofA uninsured cash flow certificates for some or all of BofA's interests in Syncora companies. This is what would really make this an earth-shattering, immediate-decimal-place-shifting event for the stock.

At the time of the 2009 MTA agreements, Bank of America and Countrywide would have been small to absent counterparties in the agreements on their own. The 2009 MTA agreements focused on CDS which largely was underwritten on CDOs, not the RMBS securities that the present settlement focuses on. However, BofA had already acquired the big player in CDOs, Merrill Lynch, whose salesmen crisscrossed the country in 2007 getting insurers to "derisk" their CDO warehouses.

Ken Lewis and John Thain shook hands in the fall of 2008, only to learn that two rocks tied together still sink. But BofA's acquisition of ML may be what brings Syncora to the surface in 2012. Based solely on historic market share, ML could easily be the holder of 1/4 or more of the roughly $900M (liquidation value - doesn't include common stock) of previously outstanding 2009 MTA securities.

While none of the securities involved in the asset exchange have any effect on statutory surplus and all are subordinate to claims payments, we view it as positive that per the press release Hold Co securities were included in the asset exchange. This could only be common stock, 40% of which was included in the 2009 MTA. We find it unlikely that Hold Co securities would have been included if all SGI securities were not also included.

This asset exchange portion of the settlement also has positive implication for Ambac debt holders as the establishment of its segregated account has a similar legacy as Syncora's 2009 MTA.

Next week's statutory statement should bring a pretty good idea of the impacts of the asset exchange. In the meantime, there were about 200k shares offered at 0.34 late Friday. We might chip away at those next week.

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