Sell Side

MBIA Gets 'New Lease on Life'

The stage is set for MBIA Inc.’s municipal-only insurer, National Public Finance Guarantee, to re-enter the public finance insurance market following the company’s $1.7 billion settlement with Bank of America, announced Monday.

“This is a huge victory for MBIA,” said BTIG analyst Mark Palmer. “A settlement with B of A unlocks for the benefit of shareholders the value of National Public Finance Guarantee Corporation, its municipal bond unit, while also paving the way to that unit returning to the business of writing new insurance policies, which it has not done for over four years. So the settlement effectively gives MBIA and National a new lease on life.”

The payment from BAC will be used to repay the outstanding balance and interest on MBIA Corp.’s loan from National. The loan balance of $1.7 billion as of April 1 was reduced to approximately $1.6 billion following its payment of $110 million in a recent settlement with Flagstar Bank.

“There were many who had written off this company as dead, and a settlement puts the company in position to re-launch the municipal bond unit,” Palmer said, adding it could be a matter of months or years before National will start writing policies again.

Alan Schankel, managing director of fixed income research at Janney Montgomery Scott, also believes that National will soon be back in the bond insurance business in the near future, but not likely this year or next.

“Bottom line, I think the settlement is a good step,” Schankel said. “They still have other hurdles and other banks they’re dealing with, but B of A was certainly the big enchilada.”

The repayment of the intercompany loan is one of three hurdles that MBIA has said National must overcome in order to re-enter the bond insurance marketplace. These hurdles also included overcoming a lawsuit brought against MBIA over the 2009 restructuring that created National, which was dismissed by a New York Judge in March, and achieving high, stable ratings.

Currently, National carries a Baa2 rating from Moody’s Investors Service and a BB from Standard & Poor’s.

Matt Fabian, managing director at Municipal Market Advisors, noted that the business of bond insurers is generally based on their rating, and the ratings have lately diverged from claims paying ability to franchise risk.

“National could in theory be upgraded in response to this,” he said. “[It’s] hard to see it getting high enough for them to transact a meaningful amount of new business, but still, an improvement’s an improvement.”

Whether or not National re-enters the market is a moot point, according to Richard Larkin, senior vice president and director of credit analysis. He believes that municipal bond insurance is a failed concept.

“The settlements puts them in better shape to pay claims that are outstanding against them, but, in my own opinion, in terms of my confidence in municipal bond insurance, neither of these settlements do anything for me,” he said, also referring to the settlement announced the same day between Assured Guaranty Ltd. and UBS.

“For the last five years, issuers have proven that the municipal bond market has done perfectly fine without bond insurance,” he said. “So in order for bond insurance companies to be successful, they’re going to have to try to insure bonds in riskier areas like hospitals, industrial development bonds, and dirt bonds, which are the only areas that really need insurance.”

In addition to paying MBIA $1.7 billion, which consists of $1.6 billion in cash and $137 million in the principal amount of MBIA Inc.’s 5.70% Senior Notes due 2034, BAC will also receive warrants to purchase 9.94 million shares of MBIA common stock, or approximately 4.9% of its currently outstanding shares, at an exercise price of $9.59 per share. The warrants may be exercised at any time prior to May 2018.

Palmer said that MBIA’s management had mentioned in the past that it could use some equity in National to sweeten the deal with BAC, if it was needed. While this is instead warrants in MBIA, it still appears to be a kicker in the deal, he said.

Other terms under the settlement include a $500 million line of credit for MBIA Corp. provided by BAC, as well as an agreement to terminate all of BAC’s outstanding credit default swap protection agreements purchased from MBIA on commercial mortgage-backed securities.

BAC will also dismiss its claims in the pending litigation concerning the restructuring transaction announced by MBIA in 2009 and the pending litigation between the parties concerning the senior debt consent solicitation completed by MBIA in the fourth quarter of 2012.

“I appreciate Bank of America’s efforts to arrive at a fair agreement that resolves a number of legacy issues for both institutions as well as the assistance provided by Superintendent Lawsky and the New York State Department of Financial Services,” Jay Brown, MBIA chief executive officer said in a statement. “While work remains to be done, today’s announcement represents a significant milestone in MBIA’s Transformation for the future and toward our goal of resuming growth in shareholder value.”

The settlement requires certain approvals of the New York State Department of Financial Services, which MBIA expects to receive shortly.

The announcement comes less than a week after New York State Supreme Court Justice Eileen Bransten denied both companies a motion for summary judgment on the issue of whether BAC is liable for the $4.5 billion of mortgage-backed securities made by Countrywide Financial Corp., which was acquired by BAC in 2008.

MBIA filed the lawsuit in September 2008, claiming Countrywide fraudulently induced it to insure the securitizations by misrepresenting characteristics of the underlying loans.

The case is MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008, New York State Supreme Court, New York County.

MBIA shares rose 45.37% to close at $14.29 Monday.



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