Radian buyer says it can back out

MGIC Investment Corp. said today that it could back out of its agreement to buy rival mortgage insurer Radian Group Inc., of Philadelphia.

Since it was announced in February, the stock deal has plummeted in value from $4.87 billion to $2.17 billion as the companies faced mounting losses from defaults on mortgages to borrowers with weak credit.

A severe blow came last week when MGIC, of Milwaukee, and Radian said they might have to write off as much as $1 billion invested in Credit-Based Asset Servicing & Securitization L.L.C., known as C-Bass, a subprime-mortgage specialist in New York.

MGIC's statement said management's preliminary review found that the company "is not obligated to complete its pending merger with Radian Group Inc. in light of the C-Bass impairment announced last week."

Radian countered with its own statement that it is "not aware of any developments that would impact MGIC's obligation to close the merger."

At issue is the possibility that there has been a "material adverse change" at Radian that would have a long-term negative impact on the business' ability to make money. If that were the case, MGIC might be able to back out of the deal - which has already been approved by both sets of shareholders and most regulators - without having to pay a $185 million breakup fee.

"No matter what they're saying, the reason for this is not C-Bass," Rob Haines, an analyst with CreditSights Inc., of New York, told Bloomberg News. "What I think is happening here is, Radian has a riskier book of business. They have second mortgages and other riskier types of mortgage products than MGIC."

Since the deal was announced, MGIC's shares are down 45 percent and Radian's shares are down 66 percent. Trading in both companies' shares was halted before MGIC's announcement. MGIC closed at $34.84, up $1.56, or 4.7 percent. Radian close at $20.62, down $2.61, or 11.2 percent.