DANAVEST

By Fabio Benedetti-Valentini,

Nov. 14 (Bloomberg) — Dexia SA, the world’s largest lender to local governments, will sell its bond insurance business for $722 million to Assured Guaranty Ltd., the bond insurer backed by billionaire Wilbur Ross.

Dexia will receive $361 million in cash and 44.6 million new Assured Guaranty shares for Financial Security Assurance Inc.’s insured portfolio of $425 billion, of which $110 billion was asset-backed securities, the Franco-Belgian lender said today. After the transaction, Dexia will own 24.7 percent of Assured Guaranty, which secured “back-up” financing from funds affiliated to WL Ross & Co.

“It’s unbelievable that they can sell the insurance portfolio for money,” said Jaap Meijer, a London-based analyst at Dresdner Kleinwort who recommends investors sell Dexia. “Still, they remain exposed to the financial products” of FSA, he added.

While Chief Executive Officer Pierre Mariani has cut risks associated with New York-based FSA, the lender must cover losses of as much as $4.5 billion at the financial-products unit. Dexia, which in September obtained a 6.4 billion-euro ($8.1 billion) lifeline from France, Belgium and Luxembourg to avert collapse, is among the worst hit European banks following the failure of Lehman Brothers Holdings Inc.

Dexia fell 13 percent to 4.35 euros by 1:35 p.m. in Brussels, valuing the bank at 7.67 billion euros. The stock has dropped 75 percent this year, more than the 60 percent decline of the 69- member Bloomberg Europe Banks and Financial Services Index.

Managing Risks

“We’ve decided to sell the bond insurance activity, which was FSA’s biggest activity,” Mariani, who replaced Axel Miller last month, told journalists in Paris. “It’s a way for Dexia to get rid of its strong exposure to U.S. real estate.”

Dexia expects to book a 1.5 billion-euro loss from the sale of the business, Mariani said.

The deal is subject to confirmation from rating agencies that the acquisition won’t have a “negative impact” on the company’s financial strength ratings, Assured Guaranty said in a separate statement. The cash portion of the deal will be funded from a share sale with “back-up commitment” from funds affiliated to WL Ross & Co., it added.

“The combination of the two organizations will create the premier financial guaranty company with the talent, capacity, financial resources and relationships to serve the demands of our customers,” said Assured Guaranty CEO Dominic Frederico.

Assured Guaranty agreed on Sept. 18 to let Ross raise his stake in the Hamilton, Bermuda-based bond insurer to 18.9 percent. Ross committed to invest as much as $1 billion in Assured Guaranty in February, taking a seat on its board.

FSA Provisions

FSA’s $16.5 billion financial products portfolio, which includes subprime mortgage-backed securities, is excluded from the Assured Guaranty deal. Dexia will cover a first loss of $3.1 billion from that unit on top of the $1.4 billion provisioned by Sept. 30. The French and Belgian states will guarantee the unit’s assets, Dexia said.

Dexia ran into trouble when it agreed in August to provide $300 million to FSA after provisions tied to the subprime crisis led to a loss at the unit. The bank had already pledged a $5 billion credit line to FSA in June, after injecting $500 million into the unit in February.

The lender said the financial crisis cost 2.19 billion euros in the third quarter, including an additional 460 million euros of FSA provisions after U.S. markets deteriorated. Bond investment losses totaled 741 million euros with 482 million euros of that attributed to Lehman.

Dexia posted a third-quarter net loss of 1.54 billion euros, after net income of 439 million euros a year earlier, the Paris- and Brussels-based bank said in an e-mailed statement today. That missed the median estimate of a 656 million-euro loss from seven analysts surveyed by Bloomberg News.