NEW YORK (Reuters) ? Shares of Scottish Re Group Ltd. plunged yesterday after it agreed to sell control of itself to MassMutual Capital Partners LLC and private equity firm Cerberus for $600 million by issuing new preferred stock.

The financing, which requires shareholder approval, throws a lifeline to the reinsurer, which could have been forced to shut down or stop accepting new business, analysts said.

But the move may leave existing shareholders worse off, investors said, because the preferreds can be converted into a large amount of new equity, and will get favoured treatment over common shares.

"It's a one-sided transaction that benefits the private equity market," said Eric Hovde, chief executive of Hovde Capital Advisors LLC, who earlier this month said he valued the troubled company at $8 a share.

In late New York Stock Exchange trading, Scottish Re's shares fell 90 cents or 13.6 percent to $5.73. Its 12-month high is $25.99 and its low is $3.10.

The company's shares have plummeted more than 60 percent since July, when Scottish Re said its chief executive had resigned and it was going to post a big second-quarter loss.

The loss came after the company put assets in offshore vehicles as collateral for financing, and then found itself short of domestic income, analysts said.

Shareholders may not be pleased with yesterday's deal, but Scottish Re chief executive Paul Goldean said on a conference call that the company had little choice but to take it.

Scottish Re, which provides coverage to life insurance companies, has been up for sale since August 15. Several potential bidders, including Germany's Hannover Re and French reinsurer Scor, backed out of the auction, analysts said.

Scottish Re needed new financing by December 6, when holders of a $115-million convertible debenture could demand payment, Goldean said.

That deadline spurred Standard & Poor's to lower Scottish Re's debt rating by four notches in November, the latest in a series of rating cuts by agencies that took Scottish Re from an investment-grade debt issuer to junk-rated.

Goldean said the lowered ratings pressured clients to find other insurers, created problems with regulators, and made it difficult to attract bidders.

Cerberus Capital Management L.P. and the strategic investment arm of MassMutual Financial Group will pay $300 million each for newly issued preferred shares that may be converted into 150 million common shares, representing 68.8 percent of the company.

Besides getting majority control, the two new shareholders will appoint six people to its 11-member board and nominate three others, Scottish Re said. They will also choose the CEO.

The new investors agreed to provide a $100-million bridge loan that would see the reinsurer through until the deal closed in the second quarter of 2007 and new long-term financing that would allow it to pursue new business.

Scottish Re, which is about 17 percent owned by private equity firm Cypress Group, said it would continue to operate its business under its current structure and would continue to be traded on the New York Stock Exchange.

Current shareholders blasted the deal, saying approval, which requires two-thirds of its current shareholders, was uncertain.

But ratings agencies welcomed the news.

"There's a lack of investor confidence given all that's developed over the last few months," Julie Burke, a managing director at Fitch Ratings in Chicago, told Bloomberg News. "In order to be a going concern, they need additional equity to get upgrades and be a more attractive counter-party for insurers."

Burke said Fitch expects to raise its outlook on Scottish Re from negative to "evolving," once the company provides details on the financing and shows the signed documents.

Standard & Poor's Ratings Services changed its outlook on the company's ratings to positive from negative, citing today's announcement. "They had limited options," Neil Strauss, the Standard & Poor's credit analyst who issued the report, said in an interview.