In exchange for providing reinsurance, MBIA will receive $741 million in premiums. New Yew York Department of Insurance, which brokered the deal, says the transaction provides MBIA with more earnings and cash flow.
MBIA is setting up a new company to guarantee municipal bonds, returning to that business after being burned insuring repackaged mortgages in an attempt to diversify and boost profits.
A spokeswoman said these plans will still go ahead and will be separate from the reinsurance it is providing to FGIC's municipal bonds.
FGIC, which guaranteed about $313.9 billion of debt as of the end of 2007, has seen its ratings slashed to junk status by all three major credit rating agencies. This transaction helps it avoid insolvency by freeing up capital, reserves and other resources for its remaining exposure, which is mainly in structured finance.
After the agreement with MBIA, FGIC will have $15 billion remaining in municipal obligations, including on sewer debt issued by Alabama's Jefferson County, which is in danger of default. It will also have another $65 billion in obligations related to structured contracts, according to the New York State Insurance Department.
As a result of the MBIA transaction, the reinsured bonds could be rated as high as double-A.