NEW YORK (Bloomberg) — Assured Guaranty Ltd., the bond insurer backed by billionaire Wilbur Ross, rose as much as 22 percent in New York trading on Friday after agreeing to acquire Dexia SA's Financial Security Assurance Holdings Ltd. for $722 million.

Assured Guaranty will pay Dexia, the world's largest lender to local governments, $361 million in cash and 44.6 million new shares under the agreement, the companies said in separate statements. After the transaction, Dexia will own 24.7 percent of Bermuda-based Assured Guaranty, which secured "back- up" financing from funds affiliated with WL Ross & Co.

The agreement marks a sign of consolidation in the bond insurance industry, which has been struck by losses and credit- rating downgrades. After five other bond insurers lost AAA rankings this year, Assured took market share from larger competitors MBIA Inc. and Ambac Financial Group Inc.

Since July, Moody's Investors Service has been reviewing the top rankings of Assured and FSA and today reiterated it may lower the grades.

"Prior to this announcement, we would have said it was highly likely both companies would be downgraded," Mark Lane, an analyst in Chicago at William Blair & Co., said in a telephone interview. "They've really kind of forced Moody's hand."

Assured Guaranty said it will assume $730 million of FSA's outstanding debt. The company said it expects to finance the cash portion of the purchase through a public equity offering that's being backstopped by WL Ross.

The share sale and Dexia's commitment to take a stake buttress the case to Moody's because they prove Assured Guaranty is able to raise capital, chief executive officer Dominic Frederico said on a conference call on Friday. A merger would also reduce competition in the business, he said.

"I guess we can raise capital in a very oppressive market," Mr. Frederico said. "That in my mind should have a huge impact in their view of our financial flexibility."

Mr. Frederico said later that "it's not only hard to predict what" rating firms are "going to do, it's impossible".

The deal is subject to confirmation from ratings companies that the acquisition won't have a "negative impact" on the financial strength ratings of either insurer, Assured Guaranty said in its statement. Fitch Ratings said in a statement on Friday that it "does not expect" any. Downgrades of either firm unrelated to the merger wouldn't kill the deal, Frederico said.

"The potential impact of the proposed transaction on the ratings of Assured Guaranty and FSA will be considered in the context of its ongoing rating reviews of both companies," Moody's said in a statement. "Those reviews are now expected to conclude in the near term."

Dexia expects to book a 1.5 billion-euro ($1.9 billion) loss from the sale of the business, chief executive officer Pierre Mariani told journalists in Paris.

"We've decided to sell the bond insurance activity, which was FSA's biggest activity," said Mr. Mariani, who replaced Axel Miller last month. "It's a way for Dexia to get rid of its strong exposure to US real estate."

Assured Guaranty agreed on September 18 to let Mr. Ross raise his stake in the bond insurer to 18.9 percent.

Mr. Ross committed to invest as much as $1 billion in Assured Guaranty in February, taking a seat on its board.

Assured Guaranty backed 43 percent of all insured municipal bonds sold in the third quarter, according to data provided by Thomson Reuters. Demand for insurance tumbled with just $10 billion of bonds insured in the third quarter, down from $23 billion in the first quarter.

Bond-insurer consolidation amid surging losses on mortgage- tied debt has occurred so far through transfers of obligations.

MBIA, the largest by outstanding guarantees, in September won approval from regulators to reinsure $184 billion of municipal bonds backed by a FGIC Corp. unit. Armonk, New York- based MBIA will receive about 80 percent of unearned premiums and return 20 percent to FGIC as a ceding premium, according to a September 26 document from the New York State Insurance Department. In December, Ambac of New York, the second largest, said Assured had agreed to reinsure $29 billion of Ambac-backed securities.

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. France and Belgium will guarantee the unit's assets, Dexia said. Dexia is based in Paris and Brussels.

Clark Wagner, director of fixed income at First Investors Management in New York, said news of the deal didn't appear to affect pricing on municipal bonds insured by the two firms yet. The purchase might eventually help debt insured with Financial Security Assurance policies "slightly," he said in an e-mail.

"The market wasn't placing much value on either insurer," said Mr. Wagner, who manages mutual funds that invest in insured municipal bonds.