Business Context and Reporting Period
Company: Assured Guaranty Ltd.
Filing Type: Form 8-K (Current Report)
Date of Report: November 30, 2009
Event: Pricing of a public offering of common shares and disclosure of supplemental risk factors related to the acquisition of Financial Security Assurance Holdings Ltd. (FSAH).
Key Financial Metrics and Offering Details
Capital Offering:
- Shares Priced: 23,924,000 common shares.
- Underwriter Option: 30-day option to purchase up to 5,775,000 additional shares.
- Underwriter: UBS Securities LLC (sole underwriter).
- Expected Closing: December 3, 2009.
- Use of Proceeds: General corporate purposes and completion of the external capital portion of the capital initiative plan for subsidiaries (including potential contribution to Assured Guaranty Corp.).
Pro Forma Financial Information (Unaudited):
The filing includes unaudited pro forma combined condensed financial statements reflecting the acquisition of FSAH as if it occurred on January 1, 2008 and January 1, 2009.
| Period | Pro Forma Total Revenues ($000s) | Pro Forma Net Income/Loss ($000s) | Net Income Per Diluted Share |
|---|---|---|---|
| Year Ended Dec 31, 2008 | $806,010 | $(1,072,802) | $(7.17) |
| Nine Months Ended Sep 30, 2009 | $1,777,138 | $658,486 (Attributable to Assured Guaranty Ltd.) | $5.79 |
Note: 2008 and 2009 amounts are not directly comparable due to the adoption of ASC 944-20 (FAS 163) effective January 1, 2009, which significantly changed accounting for financial guaranty insurance.
Material Changes and Unusual Items
Acquisition of FSAH:
- The pro forma results reflect the acquisition of FSAH, including the transfer of FSAH's financial products companies and Guaranteed Investment Contract (GIC) operations to Dexia Holdings Inc.
- 2009 Acquisition Impact: The actual consolidated results for the nine months ended September 30, 2009, included a bargain purchase of approximately $232.6 million, offset by a loss on the settlement of a pre-existing relationship of approximately $170.5 million and a goodwill impairment of approximately $85.4 million, resulting in a net expense of $23.3 million. Additionally, $80.2 million of acquisition-related expenses were incurred.
Credit Default Swap (CDS) Portfolio:
- As of September 30, 2009, the CDS portfolio held by Assured Guaranty Corp. (AGC) and Assured Guaranty Municipal Corp. (AGM) had mark-to-market losses of $1,148 million.
- These losses are currently treated as ordinary insurance losses for tax purposes (generating deferred tax assets) but are only deductible upon realization. There is a risk the IRS could recharacterize these as capital losses.
Guidance, Risks, and Contingencies
Tax Risks and Uncertainties:
- U.S. Tax Status: Significant uncertainty exists regarding whether Assured Guaranty Ltd. or its foreign subsidiaries are engaged in a U.S. trade or business, which could subject them to U.S. corporate income and branch profits taxes.
- Bermuda Taxation: Tax protection assurances from the Bermuda Minister of Finance expire on March 28, 2016. The company may become subject to Bermuda taxes after this date.
- Controlled Foreign Corporation (CFC) & RPII: U.S. persons holding 10% or more of shares may be subject to taxation under CFC rules or Related Person Insurance Income (RPII) rules if certain thresholds are met. The company believes current ownership dispersion prevents this, but IRS challenges are possible.
- PFIC Status: If classified as a Passive Foreign Investment Company (PFIC), U.S. shareholders could face adverse tax consequences. The company does not currently expect to be a PFIC, but regulations are unsettled.
- Section 382 Ownership Change: FSAH likely experienced an ownership change under Section 382 of the Code, which could limit the use of tax attributes, though the company currently believes the impact will not be material.
Legislative Risks:
- New U.S. tax legislation enacted on November 6, 2009, extends net operating loss carryback periods. The company is reviewing the implications.
- Proposed U.S. legislation could eliminate tax advantages for foreign-domiciled companies with U.S. connections, including limits on reinsurance premium deductibility.
Investor Verification Checklist
- Offering Terms: Verify the final public offering price and total capital raised, as the 8-K only confirms the number of shares priced.
- Tax Classification: Confirm the company's ongoing status regarding U.S. trade or business, CFC, RPII, and PFIC classifications, given the high degree of regulatory uncertainty cited.
- CDS Loss Realization: Monitor the realization of the $1.148 billion mark-to-market losses on the CDS portfolio and any IRS challenges to their tax treatment.
- Bermuda Tax Expiry: Track legislative developments in Bermuda regarding the expiration of tax protection assurances in March 2016.
- Pro Forma Adjustments: Review the specific pro forma adjustments (Notes a-l) to understand the impact of the FSAH acquisition on future earnings, particularly the elimination of deferred acquisition costs and fair value adjustments to debt.