Financial Guaranty Insurance Company completes reinsurance transaction with MBIA Insurance
Client(s) Financial Guaranty Insurance Company (FGIC)
Jones Day advised Financial Guaranty Insurance Company (FGIC), a leading national mono-line financial guaranty assurance company, in a transaction in which MBIA Insurance Corporation (MBIA), a subsidiary of MBIA Inc. and another leading national mono-line financial guaranty assurance company, reinsured FGIC's risk under financial guaranty policies covering $166 billion in par of public finance obligations. This reinsurance transaction was one of the largest and most notable reinsurance transactions in history; in many ways an unprecedented transaction.
This transaction posed numerous complex challenges. The transaction was driven and overseen by the New York State Insurance Department (NYID). FGIC's insurer ratings had been significantly downgraded in the past year due to uncertainty regarding structured finance guarantees that FGIC had written, and FGIC's statutory capital levels were low. The NYID had made clear that FGIC would have been placed in rehabilitation, the insurance equivalent of receivership, if it did not raise new capital quickly. Jones Day worked with FGIC's financial advisors, Goldman Sachs, to run an auction process involving numerous different proposed structures and transactions to recapitalize FGIC. A reinsurance transaction quickly emerged as the most likely transaction, one that would result in increased statutory capital for FGIC and additional protection for the public finance policyholders. Negotiations continued through multiple rounds of bids over a four month period, with MBIA emerging as the winning bidder.
Jones Day worked with counsel to the NYID to construct an innovative process involving policyholders' notice and opportunity to be heard and the invocation of the statutory powers of the NYID to eliminate the risk of fraudulent conveyance or voidable preference claims. The process so developed has been described as a "model process" and is likely to be used by other insurance regulators in the future.
Another obstacle to closing was litigation brought by FGIC's preferred shareholder, a subsidiary of General Electric, alleging that the transaction was a sale of substantially all of FGIC's assets which required GE's consent. The litigation was commenced in Delaware Chancery Court seeking a preliminary injunction preventing the parties from proceeding to closing. The complaint was filed on September 4, 2008 and a hearing on Plaintiff's request for a preliminary injunction was held on September 29, 2008. In the interim, Jones Day attorneys reviewed over 3 million documents, conducted or defended over twenty depositions, worked with three separate expert firms to produce opening and rebuttal reports, and filed a principal and reply brief on the merits. The litigation was resolved, and an amended FGIC charter adopted, following the hearing, and the transaction closed as scheduled.
Jones Day's representation of FGIC necessitated the design and delivery of highly integrated solutions to complex issues without clear precedents. Accomplishing this result required the efforts of lawyers from Jones Day's New York, Cleveland and Columbus offices in the practice areas of mergers & acquisitions, business restructuring & reorganization, banking & finance and litigation.
In re American Home Mortgage Holdings, Inc., et al., Debtors 07-11047 (Bankr. D. Del.)