BRUSSELS (Reuters) – Shares in Dexia (DEXI.BR: Quote, Profile, Research, Stock Buzz)(DEXI.PA: Quote, Profile, Research, Stock Buzz) fell sharply on Friday after the Belgian-French financial services group said it had agreed the sale of its troubled U.S. bond insurance subsidiary and launched a cost-saving drive following a heavy third-quarter loss.
The world’s largest municipal lender, the recipient of a 6.4 billion euro ($8 billion) public bailout in September, said it would sell the insurance business of Financial Security Assurance (FSA) to U.S. peer Assured Guaranty (AGO.N: Quote, Profile, Research, Stock Buzz).
Dexia’s shares opened up, but then fell as much as 13.9 percent. They closed down 12.0 percent at 4.40 euros, against a 0.4 percent rise in the DJ Stoxx European banking index .
The deal excludes FSA’s portfolio of riskier securities linked to subprime mortgages. This will receive guarantees from Belgium and France, support that could lead to further dilution of Dexia’s shares.
Kurt De Baenst, analyst at Fortis said: “The results are almost unimportant. There are so many one-offs. All the attention is on FSA. There’s relief that there’s a solution, but no one knows what the real impact will be for Dexia.”
Triple-A rated Assured, which has largely avoided the credit problems that have plagued rivals Ambac (ABK.N: Quote, Profile, Research, Stock Buzz) and MBIA (MBI.N: Quote, Profile, Research, Stock Buzz) by avoiding insuring repackaged subprime mortgages, said it expected the deal to be completed in the first quarter of 2009.
The company, in which billionaire Wilbur Ross has a key stake, would take on $730 million of FSA’s debt.
Dexia said it would refocus on its core businesses in public, retail and commercial banking in Belgium, Luxembourg, Turkey and Slovakia, and launched a 15 percent cost savings plan, with 300 million euros of savings already identified.
Dexia Chairman Jean-Luc Dehaene said: “This guarantee, together with the previous state guarantee on Dexia wholesale funding and the recent capital injection by Dexia’s core shareholders, enables Dexia to face with confidence this major global financial crisis.”
Dexia’s net loss in the July to September period was 1.544 billion euros ($1.93 billion), at the top end of market expectations, due to a negative impact from the financial crisis of 2.191 billion euros. Excluding this, the net income was stable.
Analysts were expecting a hefty loss, but their forecasts ranged from 200 million euros to 1.7 billion euros.
FSA, whose vital top credit rating was under threat, made a $333.5 million net loss in the same period.
Dexia said it would receive $361 million from Assured as well as 44.6 million new Assured shares, making for a total consideration of $722 million, based on Thursday’s closing price. Dexia would hold 24.7 percent of the U.S. company.
Dexia would book a 1.5 billion euro net loss on the deal.
FSA’s financial products portfolio would be carved out of the transaction and put into run-off, under Dexia’s ownership with state guarantees for the assets – 62 percent for Belgium, 38 percent for France.
Dexia would cover the first loss of $3.1 billion above the amount of $1.4 billion already set aside. For losses over $4.5 billion, the states would be entitled to receive shares of Dexia or profit sharing certificates.
Dexia said its fourth-quarter results would be hit by market conditions, the FSA deal, higher funding costs and restructuring charges, but its solvency would remain strong.
Its Tier 1 capital ratio was 14.5 percent at the end of September, or 11 percent including the FSA deal.
Dexia’s shares have lost 80 percent since their May 2007 peak of 24.95 euros and are nearly 60 percent down in the past two months against a drop of just over 40 percent of the DJ Stoxx European banking index .
By Philip Blenkinsop
(Additional reporting by Sudip Kar-Gupta in Paris, Editing by Richard Hubbard, David Cowell, Hans Peters and Sharon Lindores)