Radian Group Inc. bought $100 million of default protection on an MBIA Inc. unit to help hedge against losses on a collateralized loan obligation backed by the two insurers.
Radian is the second insurer, behind MBIA Insurance Corp., on a guarantee of about $377 million on a CLO called Zohar that’s backed by loans to smaller companies. Radian purchased half of the protection in August 2013 and the rest in June, Chief Risk Officer Derek Brummer said today in an interview, after his Philadelphia-based firm disclosed the hedge on a conference call with analysts.
“We think there’s certainly a risk of them defaulting, given their structured-finance portfolio, and also quite frankly their exposure to the transaction,” Brummer said of MBIA by phone. “Radian Asset’s overall book is very strong, so we’re in a position to take actions such as reasonably hedge a risk like this.”
The MBIA insurance unit was hobbled in the financial crisis by losses tied to soured mortgages. After being stripped of its top credit rating and cut to junk, the company was shut out of the business of guaranteeing bonds amid doubts about its ability to meet its obligations.
Credit-default swaps that would pay out if MBIA Insurance fails to meet its obligations in the next three years have climbed to 8.28 percentage points upfront today from 3.23 percentage points in June, according to data provider CMA. That means it would cost $828,000 initially to protect $10 million of obligations through September 2017, in addition to $500,000 a year.
The contracts are down from as high as 48 percentage points in November 2012 as the company settled claims on some of the most toxic debt it guaranteed.
CLOs pool high-yield corporate loans, which are often used to finance leveraged buyouts, and slice them into securities of varying risk and return. The type of debt that Radian and MBIA guaranteed is known as a middle-market CLO, and is often used to finance more lending.
Brummer said there’s a risk the companies tied to the CLO may not be able to arrange new loans when they come due.
“It has not been paying down at the rate we would expect,” he said. “There’s potential refinancing risk with respect to the underlying loans.”
Radian has been focusing on its mortgage insurance business. The firm hired Goldman Sachs Group Inc. to weigh options for its Radian Asset bond guarantor, including a sale.
Radian rallied 5.3 percent to $13.42 at 4:15 p.m. in New York after reporting a profit as the housing market improved. MBIA, based in Armonk, New York, rose 1.3 percent to $9.47 after reporting second-quarter results that beat analysts’ estimates. The stock traded as high as $10.17 earlier today.
Kevin Brown, a spokesman for MBIA, referred to a statement the insurer made when it reported results yesterday.
“The company believes MBIA Corp.’s current liquidity position, together with future cash inflows, is adequate to make expected future claim payments,” MBIA said.