Moving along with its plan to overhaul its insurance operations, General Electric Co. agreed to divest its Financial Guaranty Insurance Corp. (FGIC) subsidiary after more than a year of searching for a buyer. It is selling the business to an investor group comprised of strategic buyer PMI Group and private equity firms The Cypress Group, The Blackstone Group and CIVC Partners. The deal, which is expected to close in the fourth quarter, gives FGIC an enterprise value of $2.16 billion.
“This is effectively a waterfront property,” Cypress Managing Director William Spiegel said of FGIC. “There’s a natural barrier to entry, it’s a stable business year in and year out, and we are going to be able to broaden the services and offerings, so there’s room to grow.”
FGIC is an underwriter of bond insurance and focuses primarily on municipal issues. The unit also provides structured finance products for mortgage-backed securities and asset-backed commercial paper instruments. As part of GE, FGIC reported net income of $217.6 million in 2002, representing a small jump from 2001, in which the division posted $215.3 million in net profits.
The company is widely considered the most conservative in the municipal bond insurance market. Some industry pros speculate that this strategy may have led to GE’s difficulties in selling the unit. “Historically FGIC’s municipal bond insurance focus has created a low risk, low return business that appears to have found little interest as GE attempted to sell it,” Bear Stearns & Co. said in a research note to clients.
Still, the report went on to say that the purchase price, at about 12 times FGIC’s earnings, is in line with the market valuations of competitors Ambac, XL Capital and MBIA, which range from 10 to 12 times Bear Stearns’ estimated 2003 earnings per share.
The buying group plans to finance the transaction with a hefty provision of equity, totaling $1.44 billion. Of that, PMI will supply a $607.1 million equity stake, yielding a 42.2% stake for the mortgage insurer. Cypress and Blackstone will each provide $332.9 million in equity, giving the firms identical 23.1% stakes, while CIVC Partners will chip in with $101.2 million in equity for a 7% holding. GE, meanwhile, will maintain a 4.5% common equity ownership, in addition to $234.6 million of participating mandatorily convertible preferred stock. Bank of America, which advised the investor group, will provide the balance in the form of senior debt facility.
Spiegel said the buying group went after a conservative financing arrangement in an effort to sustain the business’ attractive credit rating. “Nothing is more important in this business than maintaining a triple-A rating,” Spiegel stated. “This is a very rating-sensitive industry, and there are limits to how much you can lever the business.”
Following the announcement of the transaction, Fitch Ratings affirmed FGIC’s AAA’ rating, reflecting “FGIC’s well-established name within the financial guarantor industry, lowest-risk insured portfolio in the bond insurance industry, stable, albeit modest level of earnings, sufficient excess capital and favorable current market conditions.”
Private equity’s attraction to FGIC is not surprising, given its low-risk focus on the municipal sectors, chiefly targeting general obligation and the water and sewer markets. The unit also directs its structured finance business to high-quality mortgage backed securities, again taking a cautious approach.
However, in growing the business, the buying group intends to expand into new markets. To lead the company’s new era of growth, the consortium tapped Frank Bivona as the future CEO, who will assuming the position once the transaction is complete. Bivona formerly served as vice chairman and CFO at Ambac Financial Group.
“Our goal will be to position FGIC as a global provider of credit enhancement insurance…insuring investment grade fixed income securities in the municipal and asset-backed markets in the U.S., Europe, Japan and Australia,” Bivona said.
He added FGIC will also look to “expand the company’s presence beyond its traditional public finance focus [and will] draw on opportunities for synergy with PMI.”
While the buying group appears to agree on the best strategy for growth, the approach to finding an exit may be up for debate. PMI, in a conference call, diagrammed a blueprint to eventually gain majority control of FGIC, while Cypress’ Spiegel identified the company as a strong candidate for the public markets, like its competitors MBIA and Ambac.
Bear Stearns’ report cited the possibility of divergent long-term intentions among its list of concerns, noting, “[The private equity] investors may have different (i.e. shorter term) objectives than PMI (strategic, long-term).” The investment bank also cautioned, though, that an IPO or strategic sale “would be impossible if the business is not successful.”
Cypress plans to use its $2.4 billion Cypress Merchant Banking Partners II LP for the transaction, while Blackstone will utilize its Blackstone Capital Partners IV LP for the purchase, a $6.45 billion fund. CIVC, meanwhile, is currently investing out of its $800 million CIVC Partners III fund.