Behind Ross' Bond-Insurance Bet

The billionaire investor is hoping his cash infusion will strengthen Assured Guaranty's position in the turbulent industry

by David Bogoslaw

It's certainly not as cheap as his prior ventures into troubled industries, but Wilbur Ross' proposed $250 million investment in Assured Guaranty (AGO) could be just as lucrative if the wave of consolidation he expects in the financial guaranty sector materializes.

In a conversation with BusinessWeek on Feb. 29, the billionaire indicated that Assured could use the new capital to grow its business by re-insuring blocks of business from other industry players – or through acquisitions.

It's more common for the investor in distressed companies to pounce when a target firm is already in or teetering on the brink of bankruptcy, when he can pick it up for a song. That's not the case with Assured, which has largely avoided the shaky portfolio investments that have plagued larger rivals MBIA Inc. (MBI) and Ambac Financial Group (ABK) in recent months.

On Feb. 29, Hamilton, Bermuda-based Assured said that W.L. Ross & Co. had signed an agreement to buy $250 million of common shares of the holding company and to commit to buy up to $750 million in additional stock sometime later if Assured so chooses.

Under the deal, Assured will sell its shares to the private equity firm at a price of $21.76 per share or 97% of the average closing price between Feb. 28 and March 3, whichever is higher. In addition, Assured has a one-year option that will allow it to sell the additional $750 million worth of equity to Ross's firm at no more than 17.5% of the current issuance price.

On Feb. 29, shares of Assured gained as much as 16% before slipping back to finish the session 12.6% higher at $25.65.

The deal comes as the broader financial guaranty sector is roiling with anxiety over whether the more embattled insurance names will be able to secure the capital they need to restructure their businesses in order to maintain their tenuous hold on triple-A credit ratings, which are required to continue to attract new business.

Ambac suffered another setback on Friday on reports that its restructuring plan is being held up by a disparity in how much money a consortium of banks is willing to invest in it and the amount of capital that ratings agencies require to maintain Ambac's triple-A rating. Separation of the municipal bond insurance business from the more troubled structured finance business would call for more capital because the company would be giving up the critical mass of the combined capital from both units, the ratings agencies are saying.

There had been speculation that Ross was considering investing at least $1.0 billion in Ambac, but "given Assured's strong market position as one of only two competitors in the primary guaranty market, and its stable AAA rating at each of the three rating agencies, the investment in Assured makes much more sense," analyst Andrew Wessel said in a research note for JPMorgan Chase & Co. on Feb. 29. (JPMorgan or its affiliates expect to receive or intend to seek compensation for investment banking services from Assured and Ambac within the next three months. It has done investment banking with Ambac and provided non-investment banking services for Assured within the past 12 months.)

Indeed, Ross told BusinessWeek that he prefers to play the role of beneficiary to a company that's starting from a position of strength and can use the money offensively to overtake its competitors rather than to a company that would use the cash defensively "simply to plug a hole."

Assured has "been growing rapidly because of the problems in the insurance industry. Hopefully, this capital is going to help them propel themselves to a new level and new standing within the industry," Ross said in a telephone interview. "They have relatively little exposure to the kind of securities that have caused trouble elsewhere."

That's why Assured's triple-A rating hasn't been called into question and why it's poised to consider doing large transactions, he added.