Hedge Funds Sue MBIA Inc. Over Restructuring, $5.4B Fund Transfer

A group of hedge funds yesterday sued MBIA Inc., claiming its restructuring and transfer of $5.4 billion of capital to a new domestic public finance insurer strands the holders of MBIA Insurance Corp. policies on securities other than municipal bonds "in a denuded insurer that will be unable to meet its obligations as they come due."

The investors are Aurelius Capital Master Ltd., Aurelius Capital Partners LP, Fir Tree Value Master Fund LP, Fir Tree Capital Opportunity Master Fund LP, and Fir Tree Mortgage Opportunity Master Fund LP. They filed suit in U.S. District Court in Manhattan and are seeking class action status.

MBIA had no comment yesterday on the suit.

The 30-page filing names as defendants MBIA Inc., MBIA Insurance, and MBIA Insurance Corporation of Illinois. MBIA Illinois is scheduled to be renamed National Public Financial Guarantee Corp. and write only public finance business going forward under the restructuring plan unveiled last month.

Under the restructuring, MBIA Insurance, the bond insurance subsidiary, ceded its entire $537 billion book of public finance business to subsidiary MBIA Illinois. MBIA paid MBIA Illinois approximately $2.89 billion for reinsuring the public finance business and also capitalized it with an additional $2.09 billion.

MBIA said the split should signal to investors that it will not be using its public finance book to subsidize its structured finance guarantees, and that it has ample capital to meet its expected claims for all parties. MBIA Corp. will retain all structured finance and international exposures.

The hedge fund plaintiffs claim that the restructuring reduces the holders of MBIA Insurance financial guarantee polices with holders of guarantees from "a moribund and insolvent MBIA Insurance company left largely with guaranty exposures to toxic securities and instruments and no prospect of writing new business."

The suit claims that the MBIA Insurance policies total $241 billion on residential mortgage-backed securities, commercial mortgage-backed securities, other asset backed securities, collateralized debt obligations, international public finance obligations, guaranteed investment contracts, and medium-term notes.

The New York Insurance Department "facilitated and supervised" the split. But hours after MBIA announced the restructuring, Standard & Poor's downgraded MBIA Illinois to AA-minus from AA and MBIA Insurance to BBB-plus from AA.

The plaintiffs also claim that in the restructuring "the senior executives at MBIA Inc. intentionally determined to engage in a transaction that favors themselves and MBIA Inc. shareholders at the expense of MBIA Insurance policyholders who they are obligated to protect, to discriminate in the protection of existing municipal bond versus structured finance policyholders, to renege on the 'credit enhancement' purpose of MBIA Insurance policies, and to leave MBIA Insurance insolvent and without adequate capital to meet" its obligations under the structured finance policies.

By contrast, the plaintiffs cite the planned launch by Ambac Assurance Corp. muni-only insurer Everspan Financial Guaranty Corp. as not favoring the municipal policyholders over the structured finance policy holders.

"Ambac chose to have the existing monoline insurer own all of Everspan's stock, to ensure that Everspan's equity value, and any dividends or other distributions Everspan makes on its stock, would become assets of Ambac's existing insurer, supporting legacy policyholders," the suit states.

The plaintiffs seek a jury trial on their claims that MBIA engaged in a fraudulent conveyance transaction in breach of their covenant of good faith and fair dealing with their financial guaranty policyholders. They are represented by Simpson Thacher & Bartlett LLP.

Jack Herman contributed to this article

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER