Jan. 11 (Bloomberg) -- MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers.

The yield would be 3.125 percent higher than what Greenwood Village, Colorado-based First Data Corp. paid in October when it sold $2.2 billion of bonds to finance its leveraged buyout by Kohlberg, Kravis Roberts & Co., according to Merrill Lynch & Co. index data.

``It was expensive but they needed to get it done,'' said Kevin Murphy, who oversees investment-grade and emerging-market bonds at Boston-based Putnam Investments, which has $65 billion in fixed-income assets under management. ``It's good news for the company, good news for the bond insurance sector and good news for the credit markets.''

MBIA needs the money to bolster capital and stave off a reduction in its insurance unit's top credit rating. Fitch Ratings gave MBIA until the end of the month to raise at least $1 billion. A loss of the rating would cripple MBIA's business of insuring debt.

MBIA said this week it would sell the notes and cut its dividend 62 percent to help increase its capital. In December, the company said private equity firm Warburg Pincus LLC would invest $1 billion in the Armonk, New York-based company.

The bond sale may occur as soon as today, according to a person with knowledge of the offering who declined to be identified because terms, including the final yield, haven't been set.

A spokesman for MBIA, Jeff Lloyd, didn't immediately return a call seeking comment.

JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Morgan Stanley are managing the offering.

Hybrid Bonds

The $1 billion of 25-year hybrid bonds will pay a fixed rate until 2013, when, if not called, they will begin to float. Surplus notes are bonds issued by insurance companies that state insurance regulators consider equity.

Moody's Investors Service gave the debt an Aa2 rating, two levels below MBIA's insurance company, and Standard & Poor's ranked it an equivalent AA.

Under the terms of the notes, MBIA can only make interest or principal payments with the blessing of the New York State Insurance Department, according to a preliminary prospectus.

MBIA's yield is equivalent to 956 basis points higher than U.S. Treasuries of a similar maturity. The extra yield, or spread, on investment-grade bonds is 217 basis points, according to Merrill Lynch index data. The premium to own high-yield, or junk-rated, debt is 663 basis points. A basis point is 0.01 percentage point.

Fourth-Quarter Markdowns

``That would be close to distressed levels,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. Distressed bonds trade at 1,000 basis points over Treasuries of similar maturity.

MBIA, down 80 percent in the past 12 months before today, jumped $1.84, or 13 percent, to $15.95 at 3:24 p.m. in New York Stock Exchange composite trading. Marty Whitman's Third Avenue Management LLC more than doubled its stake in the company to 10.98 percent, according to a regulatory filing yesterday.

Earlier this week, MBIA said it expects to take fourth- quarter markdowns totaling $3.3 billion on its guarantees of securities based on home loans made to borrowers with poor credit.

``Obviously, there are problems in wonderland,'' said Alan Kral, managing director of Trevor Stewart Burton and Jacobsen, a New York-based investment adviser with $750 million under management, including shares of MBIA.

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

Last Updated: January 11, 2008 15:39 EST