Bank of America Corp. is seeking to buy the majority of $329 million of MBIA Inc. bonds to block the insurer's efforts to distance itself from a cash-strapped unit that sold products protecting the lender from losses on more than $6 billion of debt. MBIA fell the most in three years.
Bank of America's bid follows a move by MBIA last week to persuade bondholders to change the terms governing almost $900 million in bonds, which would prevent a regulatory seizure of its MBIA Insurance Corp. unit from dragging the parent into bankruptcy. That would leave policyholders including Bank of America holding guarantees from an insurer that can't make good on claims.
If the insurer succeeds "the risk of MBIA Insurance Corporation being placed in rehabilitation or liquidation will increase, which would jeopardize all policyholder claims, including Bank of America's," the Charlotte, North Carolina- based bank said in a statement. Bank of America units bought credit-default swaps backed by MBIA that protect the lender from default on $6.2 billion of debt, the bank said.
The tender offer is the latest move in a legal battle that started in 2009 and has led to settlement talks between the two companies. MBIA's insurance unit guaranteed some of Wall Street's most toxic mortgage debt before the financial crisis that started five years ago, then was shut out of its primary municipal-insurance business when Moody's Investors Service and Standard & Poor's stripped the unit of its top ratings.
MBIA is suing Bank of America, claiming that its Countrywide unit misrepresented the quality of mortgages that were bundled into securities and insured by MBIA. After the insurer won approval from regulators to separate the municipal guarantees into a new unit in January 2009 in an attempt to jumpstart that business, Bank of America was among lenders that sued MBIA to have the split overturned, arguing that it left the unit insolvent.
"Bank of America's tender offer is nothing more than an outrageous attempt to improperly interfere in MBIA's corporate affairs in order to pressure us to accept a grossly unfair settlement of our fraud and contract claims against BofA," Kevin Brown, a spokesman for Armonk, New York-based MBIA, said in an e-mailed statement.
Rather than MBIA's efforts to amend the bonds raising the risk of a seizure by regulators, "it is BofA's own refusal to honor its obligations and its strategy of delaying the put-back litigation" that's elevating it, he said.
MBIA shares dropped 19 percent, the most since November 2009, to $6.81 at 4:15 p.m. in New York.
The amendment Bank of America is seeking to block would make a cross-default provision in the bonds, which now allows creditors to demand immediate payment from the parent company if MBIA Insurance is seized, to instead be linked to the municipal unit, National Public Finance Guarantee Corp. MBIA is asking bondholders to approve the change by Nov. 21, offering to pay $10 per $1,000 of notes to those who consent.
In its counter offer today, Bank of America is offering to pay bondholders as much as a 22 percentage point premium on bonds governed by one of two indentures MBIA is trying to amend.
The lender said it would pay par, or $1,000 per face amount, for MBIA's 5.7 percent senior notes due in 2034 that are tendered by Nov. 27, and $950 between then and Dec. 11, according to the statement today. The securities traded at 78 cents on the dollar Nov. 8 to yield 7.8 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
While a successful consent solicitation by MBIA would have reduced the pressure that Bank of America could put on the insurer, the bank's tender offer "takes that alternative off the table," Brian Charles, an analyst at RW Pressprich & Co. in New York, said in a telephone interview. "It probably puts MBIA in more of a stressed situation where they need to find a settlement sooner rather than later."
Bank of America's offer hinges on a majority of the notes being tendered, without which the amendment to indentures couldn't be blocked.
Bank of America "is trying to preserve cross default so that they can wait out MBIA," said Rob Haines, an analyst at independent debt-research firm CreditSights Inc. in New York. "You rarely see this."