MBIA Escapes Distressed Label in BofA Accord: Corporate FinanceMary Childs
MBIA Inc. is no longer considered by credit-derivatives traders to be in distress after Bank of America Corp. agreed to a legal settlement that injects $1.6 billion of cash into the bond insurer and resolves five years of litigation stemming from the U.S. housing crisis.
Credit-default swaps tied to MBIA, which in February cast “substantial doubt” about the ability of one of its main units to continue as a going concern, dropped by the most on record after the settlement was announced yesterday. The plunge was enough for traders to stop quoting the upfront cost of protection on the parent company, a distinction indicating traders consider default a less imminent threat.
The settlement will allow the Armonk, New York-based company to repay a loan made by one of its units last year to its cash-strapped MBIA Insurance Corp., which guaranteed some of Wall Street’s most toxic mortgage-linked securities. That will free up funds as it seeks to revive its business of insuring state and municipal bonds.
“This was all a bet-the-house kind of scenario here,” Rob Haines, a New York-based analyst at debt researcher CreditSights Inc., said in a telephone interview. “If MBIA hadn’t reached a settlement with BofA, then MBIA Insurance Corp. was going to be seized.”
As part of the settlement, MBIA will drop demands that Bank of America’s Countrywide Financial Corp. unit buy back faulty home loans that MBIA guaranteed, while the bank ends a challenge to a 2009 restructuring of the insurer that allowed MBIA to move its municipal-bond business into a new insurance unit, according to separate statements from the company yesterday.
MBIA also issued Bank of America warrants for 9.94 million shares to be exercised at any time before May 2018 at $9.59 a share. The stock rose 45 percent yesterday to $14.29 a share and today to $16.32 at 12:25 p.m. in New York.
The bank will pay $1.6 billion in cash to MBIA and remit $137 million of the insurer’s bonds that it bought in December during a tender offer. Bank of America bought the debt during an attempt at blocking bondholder consents to amendments that would have shielded MBIA from being dragged into bankruptcy by its insurance unit. Bank of America had filed a default notice on those bonds, a claim that was dropped as part of the settlement announced yesterday, MBIA said in its statement.
“We are very pleased to have reached a comprehensive settlement agreement with Bank of America that improves the outlook for MBIA Insurance Corp. and sets the stage for National to reclaim its leadership position in the U.S. public finance insurance market,” MBIA Chief Executive Officer Jay Brown said in a news release, referring to the municipal-bond insurance unit National Public Finance Guarantee Corp.
The cost to protect against a default by MBIA Inc. for five years in the credit-default swaps market fell to 344 basis points annually as of 10:30 a.m. in New York, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. Yesterday the contracts fell by the most ever.
The swaps are down from an upfront payment of 14.3 percent on May 3 and from as high as 28.2 percent upfront in November, the data show. The upfront payments are in addition to 5 percent a year, meaning the cost last week was $1.43 million initially and $500,000 annually to protect $10 million of MBIA obligations from default for five years.
Contracts tied to MBIA Insurance Corp. dropped 30.7 percentage points to 8.5 percent upfront, the data show. That’s down from as much as 42.9 percentage points upfront in February. The swaps fell further to 5.5 percent upfront today.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
MBIA’s $275 million of 6.4 percent senior unsecured bonds due in August 2022 climbed 2.1 cents to 98.1 cents on the dollar as the yield fell to 6.68 percent from 8.59 percent before the settlement, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
After cutting MBIA’s municipal-bond insurance unit to junk in February, Standard & Poor’s credit analysts led by David Veno said they may raise the rating if the insurer was able to deflect the challenge to its 2009 split and its $1.6 billion intercompany loan was repaid.
While the $1.6 billion payment to MBIA “addresses a near-term liquidity and capital adequacy issue and resolves a degree of uncertainty,” the company’s “long-term viability remains uncertain without an additional, and likely dilutive, capital infusion,” Cathy Seifert, an equity analyst at Standard & Poor’s Capital IQ, said in a note yesterday, keeping a “strong sell” opinion on MBIA’s shares.
The bond insurer in February questioned the viability of the MBIA Insurance unit to continue as a going concern unless it reached a deal with Bank of America.
Haines estimated the settlement was about half what the bank could have paid out.
Bank of America “had been setting itself up to deal with a number something like this, in this range,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group LLP, said in a telephone interview. “It wasn’t a shock, if anything maybe it was a little bit better than people had expected” from Bank of America’s perspective, he said.
The settlement “is a terrific result for MBIA and represents a significant step forward for the company and the municipal bond market,” Marc Kasowitz of Kasowitz Benson Torres & Friedman LLP said in a statement.
Kasowitz is defending MBIA in two lawsuits brought in New York State Supreme Court in Manhattan by Bank of America and other lenders over the restructuring. Justice Barbara Kapnick dismissed one of the suits in March that sought to reverse New York state regulators’ approval of the restructuring.
Bank of America, along with Societe Generale SA, were among lenders that had sued MBIA over its 2009 restructuring in which the insurer created National Public Finance Guarantee in an effort to start guaranteeing municipal bonds again after losses from mortgage debt shut the company out of the market. The banks argued the split, approved by then-New York Insurance Department Superintendent Eric Dinallo, harmed them as policyholders.
Societe Generale, the only bank left challenging the 2009 split, will probably step out, Haines said. Jim Galvin, a spokesman for Societe Generale in New York, didn’t return a telephone message and e-mail seeking comment on the suit.
The settlement gives National a chance at being “a viable entity” writing new business, “but even if it’s not, you still have a huge stored value” with upfront premiums already booked, CreditSights’s Haines said.
MBIA Insurance is “not bulletproof” with the additional $500 million, he said, “but you’ve got a much cleaner portfolio, you have basically have double the liquidity, you have an entity that, at least for the next couple years, is probably out of the regulators crosshairs.”
While record low interest rates have created “the worst environment we’ve ever seen” for bond insurers as the benefit even a AAA rated bond insurer can add is minimal, there may be demand in the “low A to mid BBB segment of the market, smaller deals that don’t have market visibility that really would be difficult to bring to the market without bond insurance,” Haines said.
The settlement “clears a path towards a recreation of a bond insurance market,” Manal Mehta, the founder of San Francisco-based hedge fund Sunesis Capital LLC, which owns MBIA shares, said in a telephone interview.
“If you’re a hospital in Oklahoma and you want to issue $20 million of bonds, in order to facilitate capital market access, you’re going to need to get a wrap from somebody,” he said. While “no one is going to pay for insurance when they’re looking for yield,” he said, “this positions the company well for when rates ultimately rise and demand for bond insurance comes back.”