AGO, as well as the other monolines, are quite time consuming to review an analyze. This makes it quite "expensive" for me, since analytical time is money, not to mention oppurtunity costs. That being said, we are only about half way done. I usually don't post spoilers to my blog, but I will make an exception since this is so newsworthy and heavily anticipated.

First, let's review this press release:

... announced today that it has signed an agreement for WL Ross & Co. LLC (“WL Ross”) to purchase $250 million of common shares of Assured and to provide a commitment to purchase up to $750 million of additional common shares of Assured at the option of the Company. The closing of the initial $250 million investment is subject to regulatory approvals and other customary conditions. The closing of any subsequent investments will require shareholder approval, which the Company will request at its 2008 annual general meeting. First and very important observation, they signed a conditional commitment, they did not recieve any monies and may not.

“We are extremely pleased that Wilbur Ross has chosen Assured as his preferred investment vehicle in the financial guaranty industry,” commented Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd. “This flexible capital source will allow us to continue to capitalize on the significant growth opportunities we see and will support our further expansion in both the direct and reinsurance markets.” From what I have gathered, much of the strucutred product guaranty business is dead. For one, the buyers market for the stuff is near nill, and the willingess to insure it at anything near practical terms has faded. I think this is smoke and mirrors. AGO is a very well managed company from what I have gathered (one of the best in the industry), but they have written poison too, and it has hurt them to the point where the pain is evident.

Wilbur Ross, Chairman and Chief Executive Officer of WL Ross & Co. LLC stated, “We believe that Assured has an excellent opportunity during this time of uncertainty in the financial markets to provide investors with credit enhancement products in both the public and structured finance markets. We look forward to a long and profitable association with Assured.” Again, re: structured products - smoke and mirrors, but we will see.

The purchase price per common share for the initial investment will be the higher of (i) 97% of the average of $22.43 (the Company’s NYSE closing price on Friday, February 22, 2008) and the average NYSE closing price for Friday, February 29, 2008 and Monday, March 3, 2008, or (ii) $21.76 (97% of $22.43). A condition to closing the initial investment is that Wilbur Ross, Chairman and Chief Executive Officer of WL Ross, will be appointed to the Company’s Board of Directors.

The additional $750 million commitment by WL Ross is available at the option of the Company for one year from the date of the closing of the $250 million investment. The price for subsequent investments will be 97% of the volume weighted average price of the Company’s common shares for the 15 trading days prior to notice of any subsequent investment. Is subsequent investment defined as Ross's investment only or any other third party? This is a key point!  The ability of Assured to make a mandatory draw on the $750 million commitment is subject to (i) the subsequent investment price of Assured’s common shares being no more than 17.5% above or below the price per common share of the initial investment, As Moody's Zero noted, this is a significant caveat. It effectively removes the ability of AGO to draw down on the capital in dire straights of or when the share price collapses. There competitors have seen > 17.5% drop in share price in less than one trading day and have never regained it (at least not to date). If this in turn trips net worth covenants in their debt, this effectively nullifies the investment. In addition, it puts an applied cap on the updside of the stock. If there largest investor won't pay the price that was prevalent last year, even the most name brand stricken amongst us may not! (ii) the maintenance of triple-A (stable) ratings for Assured Guaranty Corp. and double-A (stable) ratings for Assured Guaranty Re Ltd. from Standard & Poor’s, Moody’s and Fitch The may also be a problem. Moody's and S&P are just rolling over as usual, acting like they are immune to litiigation, but Fitch really does look like they are aggressively trying to gain respect. There are definitely some losses coming down the pike for AGO. See the graphs below and the absence of material adverse changes in the credit quality of the Company’s financial guaranty portfolio Well we have to define "material adverse changes, becuase we have already experienced that and investment portfolio The investment portfolio has already seem some significant mark to market drawdown, see the chart below from the most recently publicly disclosed information at the time of a drawdown.

This is a sensitivity grid tat show changes in CDS positions a result of credit spread delta.

The H igh Yield  CDX  

As for the credit quality of the portfolio, let's not assume AGO floats on water. Remember when rates were dropped heavily by the Greenspan? Well that caused a flush of global liquidity which allowed structured product default rates to fall between 50% to 66%. This was directly after a significant spike marked by the recession, 9/11 and the dot com bubble burst. Well, this bubble burst is much worse than the dot com one.  Where do you things these default rates are headed now?

Now, let's take a look at AGO's par exposure...

Housing, investor owned utilites and healthcare are at risk... Tax backed project may be at risk in this environment for smaller utitilies.

My guess would have been would have been that leveraged loans and junk bonds would have sunk AGO. These area do indeed have awful macro conditions and spread are flying through the roof, but management was prescient enough to stay in the super senior AAA area with significant subordination. They are getting hit hard with directly written subprime HELOCs guarantees though (1% subordiation). Their prime and ALt-A will hit them very hard as well. Look at these numbers.

These numbers are as bad as Countrywide, oh yeah! That's why.

Consumer receivables
Mortgage-related problems seem to have seeped into consumer lending. Citigroup increased its provision for credit losses by $3.3 billion, because it expects higher delinquencies on credit cards, auto loans, unsecured personal loans, and mortgages.
Corporate bonds
The default rate of corporate bonds may also be affected by the strength of the economy. 0.675% - default rate on corporate bonds rated triple-A by Moody's.
Structured finance and corporate bonds
Over the 1991–2005 period, the average annual default rate for Fitch-rated global structured finance bonds was 0.70%, compared with 0.65% for corporate bonds.
Fitch’s global structured finance average annual default rate at the investment-grade level was 0.13%, compared with 0.11% across Fitch’s global corporate universe. Further, default rates were similar at the non-investment-grade level with 3.40% for Fitch’s global structured bonds versus 3.27% for Fitch’s global corporate ratings.
CMBS
There could be higher delinquencies from 2005 through 2007 vintage as CMBS issuance reached record levels. CMBS issuance stood at $206 bn and $215 bn in 2006 and 2007, respectively, versus $170 bn in 2005.
Fitch expects commercial loan defaults to increase in 2008, it said that the loan default rates implied by the pricing of the CMBX market indices are “extremely high.”
Differences exist among the four CMBX indices, including differences in credit characteristics. However, the loan default rates implied by current CMBX pricing on the most recently issued CMBX index are extreme. If one looks at CMBX.NA.BBB-.3, which closed at a spread of 938 basis points (bps) on Dec. 31, 2007, some market participants indicate that the implied default rate is almost three times historic default rates. Actual historic CMBS 10-year cumulative loan default rates are 8%, which means the implied default rates on CMBX are as high as 24% on average, given the recent pricing of CMBX. “Fitch expects loan defaults to rise given the current capital market environment, but not three-fold,” said Susan Merrick, Managing Director and head of Fitch’s CMBS group.   

There's a lot of pain to be felt from the UK RMBS, UK Public Finance and US muni market. I've highlighted in red what I am wary of .

The following are the hits to equity I expect AGO to take. What I haven't done yet is to calculate the payoff periods. This is rather indepth, and the longer the period the more bullish for AGO. A significicant capital infusion also takes the profit potential out of the short by adding cushion to capital. I have not factored in Wilbur Ross, and it is not a done deal so all we can do is speculate at the moment.  This is all just a rough compilation of notes and snippets of the model under development. I rushed to get it up to spark discussion. So, discuss away!!!

Overview losses as % of tangible equity