The refusal of private equity firms to join in the salvage of bond insurers being orchestrated by New York state insurance superintendent Eric Dinallo comes as no surprise. In fact, it is shocking that this idea was ever regarded as a serious possibility. Nevertheless, the headline in the Financial Times reads, “Setback for monoline rescue.” I suppose that makes for better copy than, “Highly unlikely avenue for monoline rescue funding predictably fails to pan out.”
From the Financial Times:
Leading private equity firms are unlikely to participate in any recapitalisation of Ambac and MBIA, increasing the pressure on banks to come up with a rescue package for the bond insurers.A number of firms, including Bain Capital, Carlyle Group, Kohlberg Kravis Roberts and TPG, have looked at investing in the cash-strapped groups, which guarantee the value of everything from municipal bonds to the most complicated mortgage securities.
These investors have all concluded that the risks are far too great, according to people familiar with their thinking.
The decision puts more pressure on the banks to provide rescue financing for Ambac and MBIA. Some large banks and securities firms could face large writedowns on mortgage securities as well as derivatives if the US bond insurers lose their Triple-A credit ratings.
A group of eight banks is already considering a plan to inject capital into Ambac, which needs at least $1bn. Several banks are also believed to be talking to MBIA, which needs at least $500m. It is likely that any solutions, which are also a top priority for regulators, will be crafted for each bond insurer rather than as a general bail-out.
“People who have a logical interest – a logical commercial relationship – are engaged, and that’s a good sign,” a US Treasury official said.
The reluctance of big private equity firms to become involved comes after all have looked closely at the two big monolines. They have also studied the experience of Warburg Pincus, which committed $1bn to MBIA in early December at what seemed an attractive price only to see MBIA’s share go into freefall.
Additionally, they have noted that Blackstone, which has a minority stake in FGIC, has so far declined to put more money into that troubled bond insurer.
“If we worry that we can get shot from the shadows by something we can’t see coming, it is not for us,” says the managing director in charge of financial service investments for one of the leading private equity funds. “The financial guarantors pass neither the shadow test nor the ability to understand test.”
The next two to four weeks will be vital for the bond insurers because the biggest ratings agencies have made it clear they are very close to cutting their ratings. Fitch, a smaller ratings agency, has already cut the Triple-A ratings of Ambac and FGIC.
Stephenzz 
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I find it most interesting that those that already have put money into it – thinking that it was such great super value to buy into these toxic are not putting more money into it. If these monoliners are such great great buys – how is it that the Blackstones and the like have not gotten even further ahead of everyone else and pumped more into it. Why it is open to ‘the rest of the market players’?
Leads me to the question – was it such great value when they pumped money into it first time round? I can see why the banks are keen to rescue the monoliners. However I would struggle to see why private equities would want to rush in to take on exposures to monoliners (implied in it hence credit defaults, CDOs and the host of related toxic) at this stage.
The MIBA PR exercise last week did nothing except to leave me more disturbed. We will have to see further developments of the allegations of Ackmann goes. The longer the accused does not come out to counter or discredit Ackmann’s allegations, what is the market going to think? That upon a rescue by the banks – thsee monoliners are going to come roaring back and business as usual? Come on … if only pigs can fly.
festerpig