Municipal issuers and conduit borrowers with FGIC-Insured Bonds should be prepared to file event notices when and if the FGIC Rehabilitation Plan and Novation Agreement are approved in December 2012.
On September 27, 2012, a Rehabilitation Plan (the Plan) was proposed in a New York court for Financial Guaranty Insurance Company (FGIC), one of the monoline public finance bond insurers hit hard by the financial meltdown in late 2007 and 2008 due, in part, to its structured finance business line, including guarantees of residential mortgage-backed securities and credit default swaps. The Plan, as proposed, includes the approval of a Novation Agreement between FGIC and National Public Finance Guarantee Corporation (NPFGC), which has been reinsuring a significant portion of FGIC’s municipal bond policies since late 2008.
As part of the proposed Plan, NPFGC will issue endorsements to all of the FGIC policies it now reinsures. These endorsements effectively will substitute NPFGC for FGIC on the bond policies, thereby potentially requiring a material event notice to be filed with the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access (EMMA) system. Additionally, many of these insured bonds will see a rating change upon the issuance of the endorsement, which, depending upon the current rating of the particular bond issue, may also require a material event notice to be filed. Because NPFGC has reinsured these bonds since 2008, an argument could be made that the novation is not material; however, Securities and Exchange Commission staff members, speaking at a recent conference, suggested that the better practice would be to file an event notice for a credit facility substitution and, if applicable, any rating change. In the Novation Agreement, NPFGC has agreed to use its “commercially reasonable efforts” to post a copy of the endorsement on the MSRB’s EMMA system. However, there is no assurance that this will be accomplished.
A hearing on the confirmation of the Plan is scheduled for December 18, 2012 in New York. Copies of the Plan documents, including the Novation Agreement and certain disclosures about the Plan, are available on the FGIC rehabilitation website.