MBIA Inc. (MBI), the largest bond insurer, will split its municipal bond insurance business from the mortgage-related debt guarantees that led to the loss of its top credit ratings. The shares surged 30 percent.
Armonk, New York-based MBIA transferred guarantees on about $537 billion of municipal bonds to MBIA Insurance Corp. of Illinois, which it plans to rename National Public Finance Guarantee Corp. The new unit will be separate from an existing one that guarantees complex mortgage-linked securities and other debt, which plunged in value during the U.S. housing and credit crises, prompting a 92 percent drop in the company’s shares since October 2007 and the ouster of its chief executive a year ago.
MBIA is seeking to revive its core business after guarantees on complex mortgage-backed securities and other debt saddled it with potential losses as U.S. home foreclosures soared and the market for the securities froze. The loss of its AAA ratings last year crippled its ability to write new muni-bond insurance, creating an opportunity for rivals to take market share.
“It’s a positive, but it’s a small positive,” said Robert Haines, an analyst at CreditSights Inc. in New York. “We’re going to need to see further steps and the further steps are much more challenging than the step they took today.”
MBIA also said today it has had discussions with the U.S. Treasury about additional capital, which it will need to win back its top ratings, suggesting the company may seek funds from the government’s Troubled Asset Relief Program.
Standard & Poor’s today lowered its financial-strength ratings on the MBIA Illinois unit, acquired in 1989, one level to AA- from AA, saying its capital so far is “marginally below our ‘AA’ standard.” Moody’s Investors Service said it may raise its Baa1 rating on the unit. Moody’s cut its ratings on the old insurance unit to B3, six levels below investment grade, from Baa1, citing less capital and claims-paying ability. S&P lowered it five steps to BBB+, the third-lowest investment-grade ranking, from AA.
“In order to have any impact on the muni market, it has to have a higher rating than AA-,” said Clark Wagner, who oversees about $1.5 billion, including insured municipal bond funds, as director of fixed income at First Investors Management in New York. “They probably need to raise more capital. I think if they can get high AA or AAA ratings, there’s no reason they can’t be viable as a municipal bond insurer.”
MBIA rose $1.03 to $4.51 at 4:02 p.m. in New York Stock Exchange composite trading. The cost to protect against losses on guarantees by the insurance unit that maintained MBIA’s troubled assets soared to a record after the announcement.
Credit-default swaps tied to MBIA Insurance Corp. jumped 9 percentage points to 62.5 percent upfront, according to CMA DataVision in London. That’s in addition to 5 percent a year a means it would cost $6.2 million initially and $500,000 a year to protect $10 million for five years. Banks have used the contracts to hedge against losses on other credit swaps that MBIA sold them backing the mortgage-related securities and other debt.
Credit-default swaps pay the buyer face value if the underlying company defaults on its obligations in exchange for the underlying securities or the cash equivalent.
Jay Brown, who rejoined MBIA as chief executive officer in February 2008 to replace Gary Dunton, told shareholders in a letter today that the municipal bond insurance business “will not subsidize our structured business.”
The mortgage-debt and other guarantees that plunged in value amid the housing and credit-market crisis “remain in an entity with ample claims-paying resources to meet any expected claims,” Brown.
“Municipalities and authorities have been searching for bond insurance in a marketplace where only one insurer is currently active,” New York Insurance Superintendent Eric Dinallo said in a statement. “With the return of a solidly capitalized insurer with more than 30 years of experience, we hope this will help reinvigorate the municipal bond market and help public entities get easier, less costly access to credit.”
MBIA Insurance Corp.’s share of new insured municipal debt issues in the U.S. plummeted to 2.5 percent last year from 22 percent in 2007, according to data compiled by Thomson Reuters.
The portion of new municipal issues that were insured last month slid to 15 percent, according to Thomson. Assured Guaranty Corp. (AGO), the bond insurer backed by billionaire Wilbur Ross, said it provided guarantees on $2.8 billion, or 81 percent.
Municipal borrowers used insurance on 18 percent of the bonds they sold in 2008, down from 47 percent in 2007, according to data compiled by Thomson Reuters. The unprecedented decline in private municipal bond insurance also led a blue-ribbon commission of local officials and industry professionals to call for studying the creation of a new mutually owned guarantor.
The new insurer, which might not be able to win AAA ratings, may not need them, according to Steve Stelmach and Amy DeBone, analysts at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia.
“Should National be able to attain double-A ratings, we believe that a significant portion of public finance market that remains below double-A rated would benefit from a wrap,” they wrote in a report today. “However, market acceptance of the new bond insurer remains an open question.”
MBIA paid the MBIA Illinois unit, which it plans to move to New York, $4.98 billion in premiums and dividends, according to the statement.
Brown, 60, said MBIA intends to raise capital for the new company “well in excess” of historical requirements for AAA ratings, which the insurer had until June, when both Moody’s Investors Service and S&P stripped the company of their top rankings.
MBIA Insurance Corp., the main insurance unit before the split-off now has a Baa1 rating from Moody’s and a BBB+ rating from S&P, both of which are just three levels above non- investment grade.
MBIA has had discussions with the U.S. Treasury about additional capital, Brown said in the shareholder letter.
“We will continue to explore whether this is an avenue that can provide capital to a healthy financial institution on terms that work for all of our constituencies,” Brown said. Proposed limits on compensation at companies that accept government funds, though, “create obvious challenges to attract, retain and motivate employees for organizations that accept TARP funds,” he said.