Bank of America Says MBIA Defaulted on Contested Securities

Bank of America Says MBIA Defaulted on Contested Securities
Bank of America Corp. signage is displayed outside of a branch in New York, U.S. Photographer: Victor J. Blue/Bloomberg

Bank of America Corp. claimed MBIA Inc. defaulted on one of its bonds and it sued the debt insurer, saying it interfered with a tender offer for the securities as a three-year dispute over toxic mortgages escalated.

Bank of America wants a court order that MBIA’s efforts to change the terms of its debt to prevent a potential bankruptcy are invalid, according to a complaint filed yesterday in New York State Supreme Court in Westchester County.

“Rather than compete on a level playing field with Bank of America, MBIA tortiously interfered with Bank of America’s tender offer in an attempt to ensure the success of its own consent solicitation,” the bank said.

In a failed attempt to block the changes to the debt terms, the lender sought to persuade investors last month to sell it a majority of MBIA’s $329 million of 5.7 percent bonds due in 2034 that were outstanding at the time. Instead, MBIA said Nov. 26 that it repurchased $170 million of the securities, leaving just $159 million in investors’ hands, according to data compiled by Bloomberg. Bank of America said in a statement yesterday that it had acquired $136 million of the notes.

Shares Drop

MBIA sought consent from its bondholders to alter terms of the securities to protect itself from the threat of a regulatory seizure of MBIA Insurance Corp., its unit that insured real estate-related debt that soured during the worst financial crisis since the Great Depression. After Bank of America bid to buy the December 2034 bonds, potentially providing holders with a better deal than the $10 per $1,000 of face value solicitation fee from MBIA, the insurer purchased about 52 percent of the debt in order to ensure it had sufficient support.

Shares of MBIA dropped 6.7 percent to $7.95 today after surging 4.7 percent yesterday.

The bank is objecting to MBIA’s buying back notes at or above par from a select group of holders after discouraging bondholders in a Nov. 20 statement from accepting Bank of America’s tender offer at face value, according to the complaint.

Bank of America also asserts the consent solicitation is invalid because the bond indenture dictates that if MBIA beneficially owns any portion of the notes, they don’t count as outstanding for purposes of changing the terms.

‘Any Cost’

“MBIA’s consent solicitation sought to force through amendments to its indentures at any cost to clear the way for it to push MBIA Insurance into rehabilitation or liquidation,” Bank of America said in the complaint. “In the process, MBIA disenfranchised holders of its 5.7 percent notes, depriving them of millions of dollars while coercively buying the votes of a select group of holders.”

Lawrence Grayson, a spokesman for Bank of America, declined to comment on the lawsuit. Kevin Brown, a spokesman for Armonk, New York-based MBIA, said the lender’s default notice is meritless.

The bank is suing to overturn a 2009 reorganization that split MBIA’s municipal bond insurance business National Public Finance Guarantee Corp. from its structured-finance unit.

MBIA is separately suing Bank of America, seeking to force it to buy back faulty loans in insured mortgage-backed securities, and it claims the bank is delaying that case to starve the insurer of cash.

Swaps Rise

“BofA’s failed attempt to interfere with MBIA’s consent solicitation and today’s letter are nothing more than a transparent attempt to gain leverage to force” MBIA’s insurance unit “to accept a discounted settlement of the over $4.5 billion that BofA” owes it “for fraudulent and misrepresented mortgage loans,” Brown said in an e-mailed reply to a request for comment.

“Like its purported notice of default, Bank of America’s latest lawsuit is meritless and we will respond to both accordingly,” he said.

The cost credit traders demand upfront to protect against a default by the insurance unit climbed 7.4 percentage points to 44.1 percentage points yesterday from Nov. 1, according to prices from data provider CMA. Credit-default swaps on the parent have increased 1.2 percentage points to 18 percent in that period, CMA prices show. CMA is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The case is Bank of America Corp. v. MBIA Inc., 70444-2012, New York State Supreme Court (Westchester County).

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