June 23 (Bloomberg) -- Dexia SA will provide a $5 billion credit line to help its Financial Security Assurance Holdings Ltd. unit maintain top credit ratings after a hedge fund questioned the U.S. bond-insurance unit's financial viability.

Hedge-fund manager Bill Ackman said last week his $6 billion Pershing Square Capital Management fund in New York was betting against FSA because it sold investment contracts backed by mortgage securities that have tumbled in value and may be insolvent despite its AAA rating.

The new commitment ``is a reaction to the attack of Pershing that says that liquidity at FSA's financial-products activity could be a problem,'' Chief Financial Officer Xavier de Walque said in an interview today. ``FSA in itself would not need cash. This is to avoid any doubt and to stop any speculation.''

Dexia Chief Executive Officer Axel Miller is increasing support for the unprofitable FSA unit after Moody's Investors Service joined Fitch Ratings and Standard & Poor's in stripping U.S. bond insurers MBIA Inc. and Ambac Financial Corp. of their AAA ratings on June 19 as projected losses surged for securities backed by home loans. New York-based FSA has used its top rating to gain the biggest share of new U.S. new municipal bond insurance this year.

Dexia, based in Paris and Brussels, sank for a fourth consecutive day after analysts said FSA may be unable to keep the top credit rating. The stock fell 4.9 percent to 11.39 euros in Brussels trading, the lowest since August 2003. The stock is down 34 percent this year, more than the 30 percent drop of the 59- member Bloomberg Europe Banks and Financial Services Index.

`Insufficient'

The credit line of $5 billion may be ``insufficient'' as the financial-products portfolio is vulnerable to withdrawals from investors, said Jaap Meijer, a London-based analyst at Dresdner Kleinwort who has a ``reduce'' rating on Dexia. ``It may mean that Dexia is anticipating a rating downgrade.''

The line of credit for FSA's financial-products segment is not secured by collateral, Dexia said in a statement today. The credit will have an initial term of five years and can be renewed as needed, it said.

FSA's financial products portfolio had $18.8 billion of invested assets as of March 31, according to Dexia's Web site. Eighty-seven percent of the assets were rated AAA or were Fed funds overnight investments at the end of March, Dexia said.

``We are committed to taking any and all necessary measures to ensure that FSA's ratings and leadership position in public finance are maintained,'' Miller said in a statement today.

Dexia's credit line won't solve FSA's long-term problems, said Frederic Hamm, a fund manager at Agilis Gestion in Paris, who helps oversee $235 million. ``This is going to help the unit in the short term. It's annoying to inject cash in a business that's not doing well but Dexia didn't have much of a choice. It cannot sell FSA now. The price would be too low.''

Credit Default Swaps

Credit-default swaps on FSA plunged after Dexia's statement, signaling an improvement in investor confidence. The contracts dropped 310 basis points to 470 basis points, according to CMA Datavision, wiping out almost all of the increase in the contracts since Ackman's June 18 comments.

Ackman had said he was betting against FSA by buying credit- default swaps on the insurance company, sending the contracts to a record 780 basis points on June 20, CMA prices show.

Credit-default swaps, contracts to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.

De Walque said it's ``too early'' to say whether Dexia will need to take further FSA-related writedowns. Dexia doesn't need to raise capital and didn't receive any calls from ratings agencies advising it to help maintain FSA's credit ratings, he said.

`Stressful Situation'

FSA's financial-products segment has $1.79 billion in cash, ``meaning it can withstand a very stressful situation,'' he said. The line of credit ``is very positive for the rating agencies and means Dexia is fully supporting FSA,'' de Walque said.

Dexia acquired FSA in 2000 for $2.6 billion and put $500 million of new capital into the New York-based company in February. FSA generates about 12 percent of Dexia's earnings.

Dexia board member Rembert von Lowis said in a June 19 interview that FSA has shown ``superior credit underwriting discipline,'' which has led to ``unprecedented'' opportunities.

To contact the reporters on this story: Albertina Torsoli in Paris at atorsoli@bloomberg.net; Fabio Benedetti-Valentini in Paris at fbenedettiva@bloomberg.net.

Last Updated: June 23, 2008 13:52 EDT