MBIA Outflanked by BofA in Toxic Bond Battle: Corporate Finance
MBIA shares fell the most in three years and credit-default swaps tied to its debt surged by the most since July 2009 after Bank of America offered yesterday to buy the insurer’s $329.1 million of 5.7 percent bonds due in December 2034. That would block MBIA’s plan to distance itself from its cash-strapped MBIA Insurance Corp. unit by paying bondholders to change terms governing almost $900 million in debt.
Bank of America’s offer may provoke a liquidity crisis at MBIA that would bolster the lender’s case against a 2009 restructuring. 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.
“This is a very aggressive move by Bank of America,” said Manal Mehta, founder of San Francisco-based hedge fund Sunesis Capital, which owns MBIA shares. “By using their size of their balance sheet and willfully orchestrating a liquidity squeeze by withholding payments on put backs, Bank of America hopes to thwart justice in this ongoing David versus Goliath battle.”
MBIA is asking bondholders to approve its amendment by Nov. 21, offering to pay $10 per $1,000 of notes. The proposal applies to an indenture covering $568 million of MBIA debt issued from 1994 to 2002 and a separate provision for the bonds sold in 2004 that are subject to the Bank of America offer.
Bank of America said it would pay par for those notes if they’re tendered by Nov. 27, and $950 per $1,000 of face value between then and Dec. 11, according to a statement yesterday. Its offer is conditioned on a majority of the notes being tendered, which assures it of being able to block the MBIA amendment.
The securities traded at 78 cents on the dollar Nov. 8 to yield 7.8 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. MBIA’s $141.4 million of 6.625 notes due in October 2028 fell 5.75 cents today to 67.25 cents on the dollar to yield 11.04 percent at 11:18 a.m. in New York, according to Trace data that includes trades of any size.
MBIA shares slid 19 percent to $6.81 a share yesterday, the lowest since August 2011. The stock gained 5 percent to $7.16 at 11:26 a.m.
The initial tender offer escalated a legal battle that started in 2009, when MBIA’s soured guarantees on some of Wall Street’s most toxic mortgage debt shut it out of its business of backing municipal bonds. After the insurer won regulatory approval to separate its municipal insurance into a new unit in an attempt to revive that business, Bank of America was among lenders that sued to overturn that split.
The latest offer is “an outrageous attempt to improperly interfere in MBIA’s corporate affairs in order to pressure us to accept a grossly unfair settlement of our fraud and contract claims against BofA,” Kevin Brown, a spokesman for Armonk, New York-based MBIA, said in an e-mailed statement yesterday.
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.
The amendment Bank of America is seeking to block would make a cross-default provision in the bonds that now allows creditors to demand immediate payment from the parent company if MBIA Insurance is seized to instead be linked to the more stable municipal unit, National Public Finance Guarantee Corp.
“They’re trying to gain leverage,” said Bonnie Baha, the head of global developed credit at Los Angeles-based DoubleLine Capital LP, which oversees more than $45 billion. It’s “sort of buying your way to the front of the line for a game that you didn’t really want to play, anyway,” she said.
Bank of America has been delaying progress in the MBIA suit, hoping that a default at the insurance unit while the current cross provision is in place would provoke a liquidity crisis at the parent, Chuck Chaplin, MBIA’s chief financial officer, said in a telephone interview Nov. 6.
Bank of America said in the statement yesterday that the amendment would increase the risk of regulators seizing MBIA Insurance Corp., putting all policyholder claims in jeopardy.
MBIA countered that “BofA’s own refusal to honor its obligations and its strategy of delaying the put-back litigation” is what raises the risk of a seizure, according to Brown, the MBIA spokesman. “This reprehensible conduct is yet another example of the lengths to which BofA will go to evade its obligations to MBIA and reflects the kind of self-serving behavior that precipitated the financial crisis and required hundreds of billions of dollars in taxpayer funded bailouts.”
After MBIA’s announcement Nov. 7, the difference between what credit traders demand upfront to protect against a default by the parent company and the insurance unit soared to 30.1 percentage points, the most since March 2011, from 20.5 percentage points the previous day, according to prices from data provider CMA. Bank of America’s offer almost erased that increase, with the gap narrowing to 21.3 percentage points yesterday as the cost to protect against a default by the parent company surged, the data show.
Credit-default swaps on the parent jumped 7.2 percentage points to 26.2 percent upfront, or $2.62 million initially for every $10 million of protection bought, CMA prices show. That compares with an increase of 0.9 percentage point for contracts on the insurance unit to 47 percent upfront.
Bruce Berkowitz’s Fairholme Capital Management LLC holds $11.6 million, or 3.5 percent, of the 2034 notes, as well as 3.1 percent of the company’s $270.9 million of 6.4 percent bonds maturing in August 2022, 44 percent of the 7 percent notes due in 2025, and 33.6 percent of the 6.625 percent notes, according to data compiled by Bloomberg.
Yesterday’s stock plunge cost Fairholme and private-equity firm Warburg Pincus LLC, the insurer’s two largest shareholders which together hold about 47 percent of MBIA, about $150 million, Bloomberg data show.
Jeffrey Smith, a spokesman at Warburg Pincus, didn’t return a telephone call seeking comment on the tender offer. Messages left at Fairholme Capital weren’t returned.
Bank of America may have purchased credit-default swaps on MBIA Insurance Corp., which might be triggered if regulators ordered it to stop paying claims, according to Rob Haines, an analyst at independent debt-research firm CreditSights Inc. in New York.
While Bank of America would benefit from its swaps position in that case, it doesn’t want to force the toxic unit to be seized without the parent cross-default provision in place because regulators have indicated that swaps customers would be considered unsecured creditors whose claims would be subordinate to policyholders, Haines said.
MBIA’s price-to-book ratio, a measure of its share price relative to net assets, dropped to 0.53 yesterday. That’s cheaper than most U.S. insurers with market values bigger than $1 billion, whose stocks on average trade above book value, Bloomberg data show.
Bank of America’s offer shows “a certain level of desperation,” said Jonathan Carmel, portfolio manager at Carmel Asset Management LLC. He estimated the bank has a $6 billion claim swaps on the insurer, which would “be diluted with all the other claims against MBIA Corp., and they’ll still owe the $5 billion in put backs,” he said. Bank of America’s “end game has to be a big pool of capital, and the only pool of capital is National so they’re going to try to get it put back together,” he said.
MBIA will either try to buy back its bonds or will have to increase its own offer “significantly,” Carmel said. “There are going to be a number of shots still in this war.”
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