Financial Security Assurance Inc.'s initial public offering has been postponed, but the bond insurer will still restructure its commercial real estate portfolio, FSA and U S West Capital Corp. said in a press release Friday.
On Wednesday, lead underwriter Salomon Brothers Inc. attempted to price 13.5 million shares of FSA common stock, but bankers involved in the deal said U S West Inc., FSA's ultimate parent company, was dissatisfied with the price.
Salomon Brothers tried again on Thursday, but was unable to sell FSA's stock at a price to U S West's liking, the sources said.
The postponement was due "largely [to] market conditions," said one Wall Street source familiar with the deal. "The company was very well received, but in the last few weeks financial stocks, particularly insurance stocks, have undergone some pressure."
In its filing with the Securities and Exchange Commission, FSA estimated the price for the common stock would run between $23 and $25 per share. Market sources speculated that U S West is determined to get at least $21 per share for its stake in FSA.
"FSA is simply too valuable an asset for us to continue with the offering in a market demanding bargain basement prices," said Richard A. Post, president of U S West Capital, which is FSA's immediate parent in the U S West hierarchy.
Market sources said several other IPOs were pulled last week or were priced at discount.
Retail sources speculated that FSA's offering was "doable" last week, albeit in a range below what was estimated in the SEC filing.
"Investor interest was very high," one banker said, "but with a fear of rising interest rates, people don't want to be overloading themselves with financial stock."
Robert P. Cochran, president and chief executive officer of FSA said, "Although we could have priced the offering, our bankers advised us against selling an initial public offering into a weak market for financial stocks generally, and insurance stocks in particular."
The banker said there was a "broad range" of investor interest in FSA, led by equity funds, pension plans, and life and property-casualty insurers.
There has also been "very good indications since the beginning" from foreign investors, he said.
FSA is proceeding with the restructuring of its commercial real estate portfolio, designed to segregate the firm from its exposure to the troubled sector.
"The restructuring, which was to have been done in connection with the offering, is going forward immediately," FSA said in a press release.
Betsy Halpern, managing director of corporate communications at FSA, said existing shareholders will contribute capital that would otherwise have come from the proceeds of the primary offering to be used for the restructuring.
As a result, Halpern said it is unlikely there will be a primary sale of stock when FSA's initial public offering is done.
Following the announcement, Moody's Investors Service affirmed its Aaa rating on the claims-paying ability of FSA and its wholly owned subsidiaries, FSA International Inc. and FSA of Oklahoma Inc.
"The restructuring materially reduces the risk to FSA associated with its commercial mortgage exposures," Moody's press release said.
In its confirmation. the rating agency also noted FSA's strong liquidity, below-average net leverage, absence of long-term debt, strategic plan, and strong position in core markets.
Standard & Poor's Corp., which also rates FSA's claims-paying ability AAA, did not issue a formal statement following the announcement.
Robert E. Green, a director at Standard & Poor's, said the agency affirmed FSA's rating in October when the restructuring was first announced. Since there were no material changes made to the restructuring, even though the IPO has been postponed, Green said Standard & Poor's did not expect to issue a statement.
Under the restructuring, FSA will reinsure $1.5 billion of its remaining $1.8 billion commercial real estate exposure through Commercial Reinsurance Co., a firm created by U S West and Tokio Marine and Fire Insurance Co. Ltd., which owns 8.4% of the bond insurer.
According to FSA's filing statement with the SEC, Commercial Re's initial claims-paying resources will total $473.3 million. Based on weighted average exposure of 63.9% on any future loss, $741 million of gross losses would have to occur before the initial resources would be exhausted, the filing says.
The restructuring dramatically reduces the impact that future commercial real estate losses would have on FSA. Before the agreement, FSA could expect to pay 77% on claim. That number would be trimmed to about 13.8% under the restructuring.
From 1985 through Sept. 30 of this year, FSA incurred net losses of $113.4 million in the commercial real estate sector, stemming from its exposure to three defaulted transactions with Heron International, Toll-man Hundley, and Universal Hotels. Of those losses, FSA has paid approximately $50.4 million while U S West has paid $63 million through drawings under a letter of credit issued by U S West for FSA.
In 1990, FSA ceased insuring commercial mortgage deals, which represented $1.8 billion of the firm's $25.5 billion of net par outstanding at Sept. 30.
When the restructuring is completed, and because of other third party reinsurance, FSA's aggregate maximum exposure to the three deals will be $62.9 million net par.
With the stock market set to enter the holiday season, the general consensus is that U S West will have to wait until after Jan. 1 to sell stock in FSA.
"We anticipate bringing the offering back when market conditions improve," Cochran said.
FSA has until Feb. 15 to complete the sale before the SEC will require the firm to update its financial information.
According to FSA's filing with the SEC, the company is expected to sell three million shares while U S West Capital Corp. is to sell 10.5 million.
If the over-allotment options are exercised, approximately 60.4% of FSA will be publicly owned; U S West will retain 32.2% of its shares through U S West Capital Corp., and Tokio Marine and Fire will keep 7.4%. If the over-allotment options are not exercised, U S West will own 39.9% of the monoline.
U S West currently owns 91.6% of FSA through U S West Capital Corp. In June, the firm announced its intention to focus on its core telecommunications business, setting the stage for FSA's IPO filing in October.
