Security Capital Dodges the Dreaded “Going Concern” Opinion

Troubled bond insurer Security Capital Assurance, hit hard by the downturn in the residential mortgage-backed securities market, said late Thursday that it probably won’t receive a “going concern” opinion from its auditors when it files its annual report later this month. Such an opinion is usually interpreted as a precursor to insolvency, and the company had warned in late February that its auditors were considering such language. The shift comes as a bit of good news for a company that said it lost $1.2 billion — or $18.67/ share — during the fourth quarter of 2007. The fourth quarter loss compares to net income of $35.8 million in the year-ago period. SCA, along with MBIA and Ambac, have been reeling as the U.S. mortgage crisis has unfolded. Unlike its larger competitors, however, SCA has sought additional capital and has seen its former AAA credit rating vanish as a result. Insurers like SCA provided the top-rated portions of RMBS and related CDO deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers have wreaked havoc on an already unsteady mortgage-backed bond market. CEO Paul Giordano hinted that Security Capital, however, may be looking to raise capital in the weeks ahead. “The extraordinary and rapid deterioration in U.S. residential mortgage-related credits led us to incur record levels of case reserves in the fourth quarter of last year,” said Paul S. Giordano, SCA’s president and chief executive officer. “We are continuing to explore our strategic options to generate or raise capital and improve our ratings.” The company said it had ceased writing new business for an unspecified time period as it looks to preserve capital, a move that Giordana said likely staved off a potential “going concern” opinion from auditors. Driving the fourth quarter loss at the insurer was a $651.5 million loss provision tied to CDOs backed by subprime mortgage securities, a $37.2 million loss provision tied to its insurance of various HELOC transactions, and a $9.5 million provision tied to existing reinsurance contracts. News that SCA has staved off a possible bankruptcy sent the company’s shares upward sharply. Shares were up more than 70 percent in early Friday trading on the New York Stock Exchange. For more information, visit http://www.scafg.com. Disclosure: The author owned no position in SCA when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.