Sell Side

MBIA's New Insurer Gets Some Bites

In the two weeks since announcing its restructuring, MBIA Inc. said its public finance company has already received five requests to provide bond insurance in both the primary and secondary market.

MBIA Insurance Corp. of Illinois - to be renamed National Public Finance Guaranty Corp. - has had two primary deals and three secondary deals cross its desk, the company said. It is still considering one after turning down three because of credit concerns or capacity constraints, and one because it was a misplaced inquiry.

MBIA Inc. executives said that issuers and investors have shown interest in the product but will likely wait to make sure the company receives ratings "achieving the high, stable target we've articulated." The company said it will also likely seek to raise third-party capital.

"National is open for business, but probably needs to raise a modest amount of capital to demonstrate capital market access and to exceed the quantitative capital requirements of both Moody's and [Standard & Poor's] to achieve the highest possible ratings," MBIA Inc. chairman and chief executive officer Jay Brown said during an earnings conference call with analysts and investors yesterday.

MBIA in February announced it had restructured its insurance subsidiaries to split off MBIA Illinois as its public finance-only insurer. MBIA Illinois received $2.89 billion for taking on MBIA Insurance's existing public finance book of $537 million, plus an additional $2.09 billion.

This strategy contrasts with Ambac Financial Group Inc.'s planned launch of Everspan Financial Guaranty Corp., because the new muni-only subsidiary will not take on Ambac Assurance Corp.'s existing public finance book.

After losing triple-A ratings at MBIA Insurance due to structured finance exposures, MBIA will have to convince investors about the value a guaranty from public-finance only MBIA Illinois will provide. Without the capital raises, Standard & Poor's rates MBIA Illinois AA-minus on CreditWatch developing and Moody's Investors Service rates it Baa1 on review for upgrade.

Standard & Poor's said in a report last week that "even public finance policyholders may be wary about the restructuring."

In addition, the commutation strategies taken by insurers, including MBIA and Ambac Assurance Corp., may give some investors "pause" because the insurers settled collateralized debt obligation claims on a discounted basis "in sharp contrast to the financial guaranty insurance policy standard, and market expectation, of payment in full on defaulted principal and interest as it comes due."

MBIA executives acknowledged during the conference call yesterday that the company will have to actively market its product to issuers and investors that may have concerns about it. That will mark a difference from the 1980s and '90s, when it could "afford to hang back and wait for the phone to ring," executives said.

MBIA has scheduled visits to meet with many fixed-income investors and issuers and has continued talks with investment bankers and financial advisers, it said.

National's CEO is Tom McLoughlin, who had been head of global public finance at MBIA Insurance. National will employ a staff of 40 people directly that will be responsible for deal selection, capital management, and investor relations, executives said. It will also contract with MBIA for certain support services.

MBIA plans to re-domicile the insurer in New York and request that its earned surplus be reset. It says this is the "next big step" to reestablishing the company.

Some have suggested that MBIA could face legal challenges regarding its restructuring plan. It declined to comment on that issue during the conference call yesterday, but says it has adequate capital to pay expected claims from policyholders in full.

The comments came from MBIA a day after it reported a $1.2 billion net loss for the fourth quarter of 2008 and $2.67 billion for the year. Its stock fell 0.40% yesterday to $2.49.


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