Standard & Poor's has revised to positive from developing its CreditWatch implications on its 'BBB' long-term counterparty credit and insurer financial strength ratings on Converium AG. All other ratings remain on CreditWatch with developing implications. All ratings were initially placed on CreditWatch with negative implications on 20 July and the CreditWatch status was revised to developing on 10 September. Standard & Poor's expects to resolve the CreditWatch placement by mid-October 2004.
Standard & Poor's has noted that, ahead of an extraordinary general meeting to be held on 28 September, the Converium group's board of directors has proposed that shareholders approve a capital increase of up to $400m (net of costs).
Marcus Rivaldi, a credit analyst at Standard & Poor's, said: "If capital is raised in line with the board of directors' proposals, and barring any material unforeseen event, Standard & Poor's expects to raise its long-term ratings on Converium AG to 'BBB+', and its long-term junior subordinated debt rating on guaranteed subsidiary Converium Finance SA to 'BBB-'. Additional potential upside exists for the ratings on Converium Rückversicherung (Deutschland) AG and Converium (UK) Ltd. (strategically important operations of the Converium group) should Converium AG issue to these subsidiaries an acceptably worded guarantee.” Such a guarantee would allow Standard & Poor's to rate the subsidiaries in line with Converium AG.
Failure to raise the capital or sufficient capital could result in the group failing to retain the support of its key cedents and brokers, which remains a major concern. Given its current secure capitalization, the ratings on Converium AG would likely remain at 'BBB', but would be assigned a negative outlook. The downside risk in the ratings on Converium Rückversicherung (Deutschland) AG and Converium (UK) Ltd relates to a potential failure to provide the aforementioned guarantees.
If capital is not successfully raised, said Standard & Poor's, the potential downside for the senior unsecured debt rating on Converium Holdings (North America) Inc remains materially greater following the group's main North American operating company, Converium Reinsurance (North America) Inc. (R/--/--), entering into a letter of understanding with the Connecticut Insurance Department. The rating is currently predicated on support from the European franchise and the group's incentive to service its capital market obligations. Were the capital not to be raised as planned, Standard & Poor's believes that the likelihood of the entire Converium group going into run-off would increase, and the incentive to support the debt obligations of Converium Reinsurance (North America) Inc would correspondingly diminish.
