Answers to Questions about the Novation of CIFG Assurance North America, Inc. Municipal Bond Insurance Policies to Assured Guaranty Corp.
December 12, 2011
In January 2009, CIFG Assurance North America, Inc. (CIFG) and Assured Guaranty Corp. (AGC) entered into a reinsurance transaction whereby AGC provides reinsurance to CIFG with respect to certain U.S. public finance and infrastructure bond insurance policies (the "covered policies"). CIFG and AGC also agreed that they would use commercially reasonable efforts to novate the covered policies to AGC. CIFG has begun sending requests to the issuers of insured obligations (or to the applicable trustee of the bondholders) seeking consents for the novation of the covered policies.
The novation is being implemented in two phases. In the first phase, consents are being solicited for bonds insured in the primary market. Bonds insured in CIFG’s secondary market custodial receipt program will be solicited in the second phase. To the extent regulatory filings or approvals are required in connection with the novation of any policy, requests for consent will only be sent after any applicable waiting periods have elapsed or any required approvals have been obtained.
What are the benefits of novation?
Novation gives bondholders the direct protection of AGC’s claims-paying resources. Once a municipal bond insurance policy has been novated, AGC will request, and expects to obtain, an AGC insured rating from S&P, Moody’s or both depending on which originally provided a CIFG insured rating for the related bonds. Although AGC already provides 100% reinsurance for the covered policies and administers the policies on behalf of CIFG, CIFG remains the insurer until the policies are novated, and the bondholder remains subject to credit risk of CIFG.
As a bondholder, do I need to take any action for the bond insurance policies to be novated?
In general, bondholders are not being asked to take any action at this time. If there is a trustee for an issue insured by CIFG at origination, the trustee has been asked to execute a consent to the novation. If there is no trustee (as is true for many municipal general obligations that utilize a paying agent), then the issuer has been asked to execute such consent. If an insurance policy was written by CIFG after the bonds began trading in the secondary market, the custodian bank holding the custodial receipt that associates the policy with the insured bonds will be asked to execute the consent. Bondholders may be contacted directly by the applicable trustee, issuer or custodian bank as part of the consent process.
The offer to novate a particular municipal bond insurance policy will be open through the date specified in the offer unless such date is extended or the solicitation is earlier terminated at the sole discretion of CIFG and AGC. Bondholders should contact the trustee, issuer or custodian to inquire about the status of the request and whether any action has been taken. Bondholders are also encouraged to send their contact information, together with the name of the issuer, CUSIP number, original par, series and other identifying information concerning the insured bonds, to CIFG at novationteam@cifg.com in order to facilitate the novation process.
How will I know if the insurance policy has been novated?
Novated policies will be identified in a list of covered policies maintained on this page of the Assured Guaranty website, which may be reached at www.assuredguaranty.com/novation. Additionally, once S&P and Moody’s have issued new insured ratings for a given issue, those ratings should be reflected on data services such as Bloomberg.
What happens to the insurance policy when novation takes place?
All of the terms and conditions of the policy will remain unchanged, except that AGC will be the insurer in full substitution for CIFG and, because of that substitution, AGC will have all of the rights and obligations of CIFG under the policy and related documents and CIFG will be fully released of its obligations under the terms of the policy. The consent form signed by AGC and the issuer, trustee or custodian, as the case may be, and a notice of effective date issued by AGC following receipt of the signed consent form will become part of the policy.
Will all the municipal bond insurance policies be novated at the same time?
No. Except as described below, the effective date for each policy’s novation is the date on which CIFG receives an executed consent form for that policy.
If CIFG issued a debt service reserve fund surety bond or a swap insurance policy in connection with my CIFG-insured bonds, will that be novated, too?
Separate consent requests are being sent to issuers, trustees or swap counterparties, as appropriate, for each debt service reserve fund surety bond and swap insurance policy. In cases where a debt service reserve fund surety bond or a swap insurance policy was issued in connection with a bond insurance policy or policies, CIFG must receive the executed consent forms for each bond insurance policy, debt service reserve fund surety bond and swap insurance policy, as applicable, before the novation of such policies and surety bond shall become effective. (Where there is no debt service reserve fund surety bond or swap insurance policy, multiple bond insurance policies issued in connection with a single bond transaction may be novated independently.)