Different Bond Insurance, Better Ratings - Do Bondholders Need to Consent?
BY LEN WEISER-VARON
As reported in the April 21, 2011 Bond Buyer, Assured Guaranty has announced its willingness to insure directly bonds originally insured by CIFG bond insurance, provided the existing CIFG bond insurance is extinguished. http://www.bondbuyer.com/issues/120_77/-1025816-1.html Most CIFG bond insurance policies have been reinsured by Assured since 2009. CIFG's ratings have been withdrawn, whereas Assured has AA ratings. The Assured reinsurance has not produced a AA rating on the reinsured bonds, because Assured’s payment obligation runs to CIFG, not to the bondholders. Direct insurance by Assured would raise the affected bonds' ratings to Assured's AA level.
The interesting element from a legal and practical perspective is that Assured’s offer is conditioned on the bond trustee’s or issuer’s consent to the novation (i.e. replacement of the obligated party) of the applicable CIFG bond insurance policy, and Assured’s offer expires July 15, 2011. A novation would release CIFG as the bond insurer on the policy and make Assured the insurer. Although the policy itself would not change, a novation effectively amounts to the extinguishing of CIFG's policy and its replacement by Assured's policy. Outside of a bankruptcy or other judicially approved context, stripping bond insurance policies from existing bonds without the consent of all affected bondholders raises thorny questions, and a substitution of bond insurer would likely raise the same questions. 100% bondholder consent is difficult and sometimes impossible to obtain, particularly on widely distributed bond issues, irrespective of the substantive merits of the requested amendment.
In some instances, indentures permit amendment without bondholder approval if the amendment adds security to the bonds or is not materially adverse to the interests of the bondholders. Although a novation of the CIFG policy into a AA rated Assured policy may appear to be an easy call under such provisions, it is possible that some bond counsel will struggle with the issue if the bond trustee or issuer request an opinion that a bond insurance novation transaction without 100% bondholder consent is permissible under the applicable bond documents. The judgment call may relate to whether it is sufficiently clear that, over the remaining life of any specific bond issue, the Assured bond insurance will provide better protection than the CIFG bond insurance. That is a forecast based on factual details of CIFG’s current status and future prospects, if any, as well as Assured's status and prospects.
A second question is whether under insurance law, a bond insurance policy that is either expressly or implicitly irrevocable while the insured bonds are outstanding can be extinguished (or the obligated insurer replaced) without the consent of all policy beneficiaries. This in turn raises the question of whether the beneficiary of a bond insurance policy is the bond trustee or the bondholders, and accordingly whether the bond trustee's consent with less than 100% bondholder approval validly extinguishes the original insurer's obligation on policy, whether or not such consent is permitted under the bond documents. Based on the reporting to date, Assured is seeking bond trustee or issuer consent, but has not specified that 100% bondholder approval is required. See Assured's answers to FAQs at http://www.cifg.com/media/Novation%20FAQ.pdf?PHPSESSID=ca4493697a366cc858353cf7465ebaaa. So it would appear that Assured believes that as an insurance law matter such trustee or issuer consent is sufficient, irrespective of the existence or level of bondholder consent.
Affected bondholders will look on with interest as the July 15 deadline approaches.