Jan. 9 (Bloomberg) -- MBIA Inc., the giant bond insurer hobbled by the collapse of the subprime market, will cut its dividend 62 percent and raise $1 billion in a sale of notes to boost capital and preserve its AAA credit rating.

The Armonk, New York-based company has declined 81 percent on the New York Stock Exchange in the past 12 months and fell 4.2 percent today after it reported fourth-quarter writedowns and expenses of about $4 billion related to mortgage securities.

Fitch Ratings said the plan to save $80 million by reducing the dividend and the bond sale may be enough to stave off a downgrade after giving the company until the end of the month to raise money. The share price decline signals stockholders may not be convinced that the worst is over, said Richard Larkin, a municipal bond analyst at J.B. Hanauer & Co.

``Most people don't believe the worst is over,'' said Larkin, whose firm is based in Parsippany, New Jersey. The bond insurers may ``have to go back to the well again,'' he said.

The company also said the New York Insurance Department is keeping closer tabs on its disclosures and will be given advance notice of decisions such as changes to dividends and ``significant transactions.''

Under Scrutiny

The loss of MBIA's AAA stamp would jeopardize ratings on $652 billion of bonds and threaten the company's ability to guarantee securities. Bond insurers have written $127 billion of default protection on CDOs that are backed in part by the repayment of subprime mortgages. If bond insurers' credit ratings are cut, banks are more likely to have to report additional write downs of securities.

The insurers also face competition from billionaire investor Warren Buffett, who last month started a municipal bond insurer. Ajit Jain, head Berkshire Hathaway Inc.'s new unit said today that the company may provide reinsurance to or invest in another bond insurer.

MBIA pared losses after Jain made his comments. The stock, down as much as 21 percent during New York composite trading, closed down 58 cents to $13.40.

``Everyone in the market will be watching the MBIA deal,'' said Peter Plaut, an analyst with Sanno Point Capital Management in New York. ``The ability of the financial guarantors to raise capital will determine the outlook for hundreds of billions of corporate, municipal and mortgage debt.''

Warburg Pincus

The company last month said private-equity firm Warburg Pincus LLC agreed to purchase $500 million of new shares at $31 each and to backstop a rights offering of another $500 million.

MBIA is committed to keeping its AAA rating ``without qualification,'' Chief Executive Officer Gary Dunton, 57, said today in the statement.

Seven AAA rated bond insurers, including MBIA, came under scrutiny last year. More than $2 trillion of insured debt would have been at risk of losing its top ratings if the guarantors were downgraded.

Moody's Investors Service and Standard & Poor's lowered their outlook for MBIA's insurance unit to negative last month.

MBIA in October posted a $36.6 million loss, its first ever, because of writedowns on mortgage-related securities and halted stock buybacks to retain capital. In December, the company issued a detailed disclosure of $8.1 billion of collateralized debt obligations backed by subprime mortgages, sending the stock down 26 percent in a day. CDOs repackage pools of debt into slices with varying ratings and risk.

In Discussions

The company said today it has had discussions with the U.S. Securities and Exchange Commission, as well as the insurance department of New York, in relation to its CDO disclosure as well as the Warburg Pincus investment.

MBIA revised its 2006 annual report to include more details on the potential risk it faces from credit-rating downgrades and the reduction in credit quality of the debt it insures.

MBIA said the so-called surplus notes will be sold by MBIA's insurance unit and will rank above the debt owed by the parent company. Moody's downgraded the parent's senior unsecured rating one level to Aa3 and assigned it a negative outlook. S&P cut the rating to AA-.

The dividend will be cut to 13 cents a share from 34 cents, MBIA said today.

Raising $1 billion would ``effectively address the existing capital deficiency,'' Fitch analysts Joo-Yung Lee and Thomas Abruzzo said in a statement today.

MBIA said today it benefited from maturing transactions that probably reduced its capital needs by as much as $500 million last quarter. MBIA also plans to seek insurance on some of its contracts, reducing the need for capital by as much as $150 million.

Short Interest

Short interest in MBIA was 46 million shares as of Dec. 31, more than double that of a year earlier as hedge funds including William Ackman's Pershing Square Capital Management bet the stock will decline further. Short sellers sell borrowed stock in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder.

Credit-default swaps on MBIA rose to distressed levels as investors demanded 12 percentage points upfront and 5 percentage points a year to protect MBIA bonds from default for five years, according to broker Phoenix Partners Group in New York.

The price means it costs $1.2 million upfront and $500,000 a year to protect Countrywide bonds from default for five years.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

CDO Losses

MBIA, which gets 90 percent of its revenue from insuring state, municipal and structured finance bonds, reported profits every year for at least the past 16 years. Net income in 2006 rose 15 percent to $819 million.

The $737 million expense includes $614 million set aside to cover losses on home-equity loans, MBIA said today.

The value of CDOs the company insures has slumped by $3.3 billion before tax, MBIA said. That includes about $200 million that MBIA expects to pay claims on.

The losses forced MBIA to ask Barclay's Bank Plc to change terms of a credit agreement to help it avoid breaching a net- worth condition because of the losses, according to a regulatory filing today.

The company said the losses aren't ``predictive'' of future claims.

The insurer is among some of the biggest U.S. financial institutions seeking money from outside investors to shore up capital after the value of corporate loans, subprime mortgages and CDOs slumped, causing more than $100 billion of losses.

It's too early to say MBIA is safe from a ratings downgrade, said Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut.

``Nobody knows how much capital is really needed to recapitalize this business properly,'' said Grebeck, who is also an adjunct lecturer in credit derivatives at New York University. ``Rating agencies models have failed in structured credit and CDOs.''

To contact the reporters on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: January 9, 2008 16:34 EST