MBIA Sells Notes to Raise Capital, Stay AAA

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MBIA Inc., the parent of financial guarantor MBIA Insurance Corp., sold $1 billion of surplus notes Friday, in the company’s latest efforts to shore up capital reserves to meet the requirements needed to maintain its triple-A ratings.

The notes were sold with an initial five-year interest rate of 14%. After 2013, the interest rate changes to become a value of the three-month London Interbank Offering Rate plus 11.26%. The notes are subordinate to all other existing debt and are callable at par every five years. The transaction is scheduled to close on Wednesday.

“[The interest rate] was a little higher than I thought it would be,” said Jim Ryan, an equity analyst at Morningstar Inc. “The rate that went out was a function of the fact that this was a necessity for them and the surplus bonds reside low in the capital structure.”

The note sale was part of the plan MBIA put forth last Wednesday to raise the necessary capital to meet or exceed rating agencies’ triple-A requirements. In addition to the note sale, MBIA will cuts its quarterly dividend to 13 cents from 34 cents, reinsure a portion of its insured book to free up another $50 million to $150 million, and sell up to $1 billion in stock and options to private equity firm Warburg Pincus LLC.

At the time of MBIA’s announcement, Fitch Ratings said it would reaffirm MBIA Insurance Corp.’s triple-A ratings with a stable outlook if the company sold at least $1 billion of the surplus notes. Fitch currently assigns a AAA rating with a negative watch.

“If MBIA successfully completes the [note] offering at a level of $1 billion or higher, it will effectively address the existing capital deficiency per Fitch’s modeling, and Fitch would expect to affirm all of MBIA’s ratings, including its [triple-A] insurer financial strength ratings, and assign a stable rating outlook,” Fitch said in a statement on Jan. 9.

As of press time, there were no further details on whether Fitch would go ahead with the upgrade.

However, both Standard & Poor’s and Moody’ Investors Service said Monday that they would not change their rating or outlook on the bond insurer as a result of the note sale. Both agencies assign a triple-A rating with a negative outlook for MBIA Insurance Corp.

Dick Smith, managing director at Standard & Poor’s, said the rating decision is based in part on the outlook for the bond insurance industry in general and any additional subprime mortgage related write-downs that may occur in the future.

“We still think there is enough uncertainty about the future for us not to change the outlook at this point,” Smith said. “What they’ve done is all well and good, we aren’t minimizing it, but it doesn’t give us the comfort so we can turn around and say this is set.”

It is also unclear whether muni market participants will accept MBIA’s recent efforts to shore up their capital finances. Market sources said it will take some time for MBIA and the other bond insurers with threatened ratings to regain the trust of the market.

“It’s not immediately clear if actions by Fitch, or actions by all three [rating agencies], will get the job done in terms of guaranteeing the same across-the-board acceptance that they had prior to this situation,” said Herman Charbonneau, senior vice president at Roosevelt & Cross Inc. “I think a lot of institutional buyers would want to see a full consensus from all three rating agencies on the outlook for an insurer, and some of these investors are doing their own analysis on the financial guarantors and have their own opinion of them.”

Also, Charbonneau and others said they believe the value of bond insurance is now in question. Traders and investors are now examining the underlying rating of the bond, whether it is insured or not, as a result of the recent turmoil. Many people said they believe this will continue for the foreseeable future.

“The value of insurance as a whole has been psychologically damaged,” Charbonneau said. “It will take a while to recover from that.”

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