MBIA Inc., parent company of the market’s largest bond insurer, yesterday debuted its plan to boost capital. Fitch Ratings said the plan will “effectively address” the company’s current shortfall, though MBIA also listed $737 million in new reserves to prepare for losses it expects to suffer from its exposure to the souring mortgage market.
MBIA plans to sell $1 billion of surplus notes, cut its quarterly dividend to 13 cents per share from 34 cents, and reinsure enough of its book to free up another $50 million to $150 million, according to filings submitted to the Securities and Exchange Commission. The insurer speculated that its dividend cut would save it $80 million each year and that it would free up about $300 million to $500 million of capital by slowing its new business production in the fourth quarter.
But MBIA also announced its large new loss reserves would mean a quarterly loss for the final months of 2007 and possibly for all of last year. Additional mark-to-market losses on credit derivative contracts the company uses to back some structured-finance credits will amount to $3.3 billion before taxes for the quarter.
“We believe that the outlined capital plan allows MBIA to meet its obligations, support our customers, and continue profitable growth going forward,” said MBIA chief financial officer Chuck Chaplin in a prepared statement. “While the volatility in the mortgage market and non-cash GAAP accounting standards will negatively impact our financial results for this quarter, we are quite enthusiastic about future prospects.”
MBIA Insurance Corp., the New York-based company’s bond insurance subsidiary, bases its business on wrapping municipal and structured-finance credits with its triple-A credit ratings. Recent rating agency reviews have left MBIA’s ratings on negative outlook at Moody’s Investors Service and Standard & Poor’s, while Fitch put MBIA Insurance on negative watch.
Fitch said yesterday that it would affirm MBIA Insurance’s AAA rating with a stable outlook as long as the company is able to sell at least $1 billion of the surplus notes. The notes are a type of debt that will be subordinate to other MBIA corporate debt, callable in five years, and subject to going unpaid if the New York State Insurance Department decides to suspend the payments.
The notes were rated AA by Fitch and Standard & Poor’s and Aa2 by Moody’s.
Standard & Poor’s yesterday lowered its rating on the parent company, MBIA Inc., to AA-minus from AA, while Moody’s dropped its rating on the parent to Aa3 from Aa3. Both cited the expectation of additional debt at the parent-company level for the downgrade.
None of the rating agencies changed their view on the triple-A bond insurance subsidiary, though.
“The fact that they have raised a certain amount of capital at the moment doesn’t necessarily solve the negative outlook for S&P,” said Howard Mischel, managing director at Standard & Poor’s. “It’s still a function of the market — how subprime is going to perform. Nobody really has a clear picture at this point.”
Fitch said the insurer would stay on negative watch if it is not able to sell the full $1 billion of notes. The rater continued that, “if MBIA was then ultimately unable to raise the remaining capital prior to approximately the end of January, Fitch would expect to downgrade [MBIA Insurance’s] and MBIA Inc.’s ratings by one notch.”
Also as part of its disclosure to the SEC, MBIA said it was taking $614 million of loss reserves for specific cases in its insurance exposure to prime home equity lines of credit and prime closed-end, second-lien mortgages. A further $123 million was put into reserves, representing the usual 12% of scheduled earned premiums — $23 million last quarter — and an extra $100 million for “losses that are probable to occur.”
MBIA’s likely $3.3 billion pre-tax mark-to-market loss is the largest such quarterly mark taken by an insurer. Reports of these losses played a large role in increasing scrutiny of bond insurers after third-quarter results were reported, and ACA Financial Guaranty Corp.’s $1.7 billion third-quarter mark had been the largest reported by a bond insurer until now.
In a turn from past policy, MBIA said it thinks $200 million of its fourth-quarter unrealized mark will result in actual losses. In past months, many of the bond insurers have vehemently denied that their large mark-to-market losses would result in actual losses, though MBIA said it would likely be forced to pay future claims on three collateralized debt obligation deals comprising other underlying CDOs.
Thanks to an “extraordinary widening of the market spreads” for the collateral underlying the CDOs, MBIA has changed its models to treat the collateral “as if it were in default,” MBIA said in its SEC filings.
Mark-to-market losses are not always a product of the abstract widening of spreads in a given market, said Moody’s senior vice president Stanislas Rouyer.
“For all of the companies at the end of the fourth quarter there will be a little bit of both spread widening and credit deterioration,” Rouyer said, explaining the two main reasons for insurers to take such marks. It is difficult to tell how much of the mark-to-market loss comes from each without analyzing the underlying credits, he added.
Equity analysts were pleased by the new capital plan, and Keefe, Bruyette & Woods Inc.’s Geoffrey Dunn said he thinks MBIA would have at least $430 million of capital over the rating agencies’ requirement for keeping a triple-A rating as long as the plan proceeds as proposed.
MBIA on Dec. 10 announced a new investment from private equity firm Warburg Pincus LLC that could mean as much as $1 billion of new capital invested in MBIA. Warburg agreed to buy $500 million of MBIA stock at $31 per share and said it would backstop another shareholder-rights offering during the first quarter of this year.
Dunn said he thinks MBIA would be best served to sell the surplus notes before floating its new stock offering to shareholders.
Since then, the stock has dropped and was down 58 cents, or 4.15%, in trading yesterday to close at $13.40. This implies that Warburg has lost about 57% on the value of its initial investment in MBIA.
Also included in MBIA’s disclosure was an announcement that the insurer has been talking to the New York Insurance Department and the SEC about its recent financial troubles, after receiving inquiries from both.
MBIA in January settled a multi-year investigation with the SEC, agreeing to pay $75 million in penalties and restitution for a bogus reinsurance scheme involving a now-defunct Pennsylvania hospital chain.