Moody's: MBIA, B of A Settlement a Credit Positive

The $1.7 billion settlement between MBIA Inc. and Bank of America Corp., announced Monday, is a credit positive for the company and its main insurance subsidiaries, Moody’s Investors Service said Thursday.

Moody’s rates MBIA Inc. at Caa1, National Public Finance Guarantee Corp. at Baa2, and MBIA Insurance Corporation at Caa2. All ratings are still on review for downgrade.

“Although the settlement is positive for the group, material risks remain for MBIA Corp., which had approximately $21.7 billion of below-investment-grade insured exposures at the end of 2012, excluding the exposures with BAC,” Helen Remeza, vice president and senior analyst, wrote in the report. “Our continuing rating review of MBIA will consider the potential losses of its remaining insured exposures and their risks to National and MBIA.”

Under the settlement, B of A will pay MBIA Corp. $1.7 billion, drop several outstanding litigations against MBIA, extend a $500 million line of credit to MBIA Corp. and receive warrants to purchase about 10 million shares of MBIA Inc. The settlement also includes the commutation of all MBIA Corp. policies held by B of A, including $6.1 billion of policies insuring credit default swaps referencing commercial real estate exposures.

As a result, MBIA Corp.’s liquidity is improved, Moody’s said, noting that liquid assets stood at $345 million at year-end 2012. The extinguished anticipated claims from the commercial real estate policies could have overwhelmed its liquidity and quickly driven the company into insolvency. Now that they have been commuted, MBIA Corp.’s portfolio losses will become more predictable.

“The settlement with BAC is likely to prompt other counterparties to commute with MBIA, futher reducing portfolio losses and uncertainty around the losses,” Remeza wrote. “We expect MBIA Corp.’s reported statutory capital position to be essentially unaffected by the transactions because the company indicated that the terms of the settlement are broadly consistent with amounts recorded on its statutory balance sheet at year-end 2012.”

The ratings agency said the settlement is also a credit positive for National and MBIA Inc. For National, the company will be repaid the remaining $1.6 billion from its $1.7 billion loan to MBIA Corp., which will substantially reducing intercompany linkages.

Moody’s said MBIA Inc. will benefit from the lower litigation risks and improved credit condition of its subsidiaries, which could lead to the resumption of dividends from National and more stable performance at the group’s wind-down operations.

Standard & Poor’s yesterday raised its rating on MBIA Corp. to B from CCC, and on National to BBB from BB. The agency kept its rating on MBIA Inc. at B-minus, with a CreditWatch positive.

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