Ross Bond Insurer Buy Could Lead to More

Wilbur Ross may use his $1 billion bet on bond insurer Assured Guaranty(AGO Quote) as a platform to invest in other troubled monolines, the billionaire investor tells TheStreet.com.

That includes the remote possibility that Assured may be used to either reinsure other monolines or be asked to purchase all or part of a troubled financial guarantor.

"We feel that because this is a healthy company it could play a significant role," Ross says.

The well-heeled vulture investor announced this morning that he has agreed to purchase $250 million of common shares in the financial guarantor that has managed to avoid much of the pain facing its embattled peers Ambac Financial(ABK Quote) and MBIA(MBI Quote). Ross has committed to an additional $750 million purchase at Assured's discretion.

The initial investment is subject to regulatory approvals and any subsequent investments will require approval from shareholders, which the company will request at its 2008 annual meeting.

"The concept behind this capital is that it's not rescue capital, the idea is to enhance their position for internal growth," Ross said of the first $250 million installment.

"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," CEO Dominic Frederico said in the statement.

Business for triple-A rated financial guarantors such as Assured and Financial Security Assurance has been booming because clients, typically municipalities, have been wary of doing business with rival firms. Bond insurers like MBIA, Ambac and closely-held Financial Guaranty Insurance Co. have suffered mightily due to risks that their insurance policies covering structured debt could suffer huge losses as the mortgage market collapses.

Monoline insurance companies insure debt ranging from bonds issued by cities and towns used to build roads and bridges, to securities tied to mortgages. They've been under fire from rating agencies to raise billions in capital to protect against losses in risky businesses that they began to guarantee in the late 1990s early 2000s. Both FSA and Assured, for the most part, shied away from providing insurance on such funky mortgage debt and other structured products.

Meanwhile, Ambac, MBIA and FGIC, have received intense scrutiny over the past several months from rating firms Moody's Investors Service, Standard & Poor's and Fitch Ratings over their ability to pay out claims to policyholders.

High-credit ratings are critical for these companies, which provide backstops and credit enhancements on securities from municipal bonds to funkier mortgage paper.

Earlier this week, Standard & Poor's and Moody's both affirmed the triple-A ratings for MBIA and Ambac on the basis that the firms had either completed or were working out plans to shore up their respective balance sheets. Both S&P and Moody's rate FGIC single -A and Fitch has double-A rating on the insurer.

Ratings agencies have left open the possibility that the outlook for monolines could continue to sour. Indeed, the skies seem to darken for bond insurers daily.

On Friday, CNBC reported that plans for a $2 billion to $3 billion bank-led bailout of Ambac are hitting a snag because the rating agencies are requiring more of capital infusion. This news comes as MBIA, which has raised $2.6 billion from private-equity firm Warburg Pincus and public investors, stated that it could face more writedowns because it is underwriting "very little" new business as borrowers balk at working with a company with an unstable outlook -- despite its triple-A standing.

MBIA's dilemma sends a woeful message to Ambac, because it underscores that even a triple-A label might not be sufficient to keep these companies afloat; triple-A ratings are exactly what Ambac rescuers are trying to achieve with their bailout plans.