Bloomberg News

PMI Hires Evercore, Law Firms to Explore Restructuring

October 24, 2011

(Updates shares in the 14th paragraph.)

Oct. 24 (Bloomberg) -- PMI Group Inc., the mortgage insurer that had its main unit seized by regulators last week, hired Evercore Partners Inc. to explore a possible restructuring.

PMI also retained the law firms Sullivan & Cromwell LLP and Young Conaway Stargatt & Taylor LLP, according to a regulatory filing today from the Walnut Creek, California-based insurer, which has posted 16 straight quarterly losses.

The unit was taken over by the Arizona insurance watchdog and told to pay claims at 50 cents on the dollar after losses on mortgage defaults drained capital. The operation was already prohibited from selling new coverage. PMI said that under and event of default, principal payments will become due immediately on debt including its 4.5 percent notes due in 2020.

Evercore will work with the law firms “to explore strategic and restructuring alternatives in consultation with” PMI’s stakeholders, according to the filing.

Evercore, founded by former deputy U.S. Treasury secretary Roger Altman, has advised CIT Group Inc. in a restructuring that wiped out $2.3 billion in government bailout funds and General Motors Corp. on its bankruptcy, according to the New York-based firm’s website. The restructuring group, led by William Repko and David Ying, also advised MGM Mirage in its recapitalization.

The burden of Arizona’s action may be borne most by Fannie Mae and Freddie Mac, the mortgage companies taken into government conservatorship in 2008, said Chris Gamaitoni, an analyst at Compass Point Research and Trading LLC.

‘Bit More Negative’

“The 50 percent claims payment is a little bit more negative than we had thought,” he said in a phone interview.

The government-controlled mortgage companies were the main beneficiaries of PMI’s mortgage insurance coverage last year, according to a separate regulatory filing. Wells Fargo & Co., the biggest U.S. home lender, accounted for more than 10 percent of PMI’s revenue in 2010, the filing shows.

PMI declined 15 percent to 31 cents on Oct. 21 before trading was halted on the New York Stock Exchange. The shares had plummeted 91 percent this year.

Bill Horning, a spokesman for PMI and representatives for Sullivan & Cromwell and Young Conaway Stargatt & Taylor didn’t immediately respond to messages seeking comment. Andrew Wilson, a spokesman for Fannie, and Freddie’s Brad German declined to comment. Evercore had no immediate comment.

Triad, Essent

PMI is among mortgage insurers hobbled by the worst U.S. housing crash in seven decades. Triad Guaranty Inc. stopped selling mortgage insurance policies when capital ran short in July 2008, and was ordered by a state regulator to defer 40 percent of claims payments because of “uncertainty” over whether it will meet its obligations.

Software and other Triad assets were sold to Essent Guaranty Inc., a mortgage insurer backed by Goldman Sachs Group Inc. and JPMorgan Chase & Co., in 2009.

MGIC Investment Corp. is the largest U.S. mortgage insurer, followed by Philadelphia-based Radian Group Inc. American International Group Inc., the insurer majority owned by the Treasury, and Genworth Financial Inc. also have units that sell the coverage.

Radian dropped 2.5 percent to $2.39 at 4:01 p.m. in New York Stock Exchange composite trading. Milwaukee-based MGIC slipped 1.7 percent to $2.26.

PMI had outstanding debt with more than $700 million in principal amount as of June 30, according to regulatory filings. The insurer doesn’t have the financial resources to pay the principal on 4.5 percent notes maturing in 2020, 6 percent securities due in 2016 and 6.625 percent debentures due in 2036, according to today’s filing.

Credit Swaps

The cost to protect MGIC’s debt from default for five years surged. Credit-default swaps on the firm increased 4.2 percentage points to 35 percent upfront, as of 4 p.m. in New York, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $3.5 million initially and $500,000 annually to protect $10 million of MGIC’s debt.

Contracts on Radian climbed 2.6 percentage points to 41.3 percent upfront, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--With assistance from Laura Marcinek, Mary Childs and Shannon D. Harrington in New York. Editor: Dan Kraut, Dan Reichl

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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