Moody's Investors Service said it has downgraded to Caa2 from B3 the insurance financial strength rating of MBIA Insurance Corporation (MBIA Corp.) and to Caa1 from B2 the senior debt rating of MBIA Corp.'s parent company, MBIA Inc.
The MBIA Corp. rating action concludes a review initiated in December 2011. The ratings outlooks for both companies are developing.
The rating actions have implications for various transactions wrapped by MBIA Insurance Corporation as discussed later.
Moody's stated that the downgrade of MBIA Corp. to Caa2, from B3, reflected a number of factors: the insurer's weak liquidity position. At September 30, 2012, MBIA Corp. had approximately $386 million of liquid assets — a modest amount relative to the insurer's contingent liabilities; ongoing deterioration of MBIA's commercial real estate portfolio that could lead to meaningful claims in the near future and threaten MBIA's already strained liquidity; the likelihood that any potential global settlement with Bank of America over outstanding claims would be consummated at terms characteristic of a distressed exchange; the likelihood of a claims payment deferral or other regulatory intervention at MBIA Corp. absent a settlement with Bank of America should significant claims materialize.
Last week, Bank of America Corporation announced that it had made a tender offer to purchase at par any and all of MBIA Inc.'s outstanding senior notes due 2034. The tender offer follows MBIA's announcement on 7 November that it would solicit consent from its senior noteholders to amend its debt indentures by substituting National Public Finance Guarantee Corporation for MBIA Corp. in the definitions of "Restricted Subsidiary" and "Principal Subsidiary."
The proposed indenture amendments, if approved by more than 50% of the noteholders of each series of MBIA Inc. notes, would allow MBIA Inc. to avoid a default on its own debt if MBIA Corp. were placed into a rehabilitation or liquidation proceeding. BAC's tender offer on 13 November seeks to obtain ownership of at least 50% of one series of MBIA notes in order to block MBIA's consent solicitation.
The insurance financial strength rating of MBIA Mexico, S.A. de C.V. was also downgraded to Caa2 (national scale rating of Caa2.mx) with a developing outlook, given its reliance on the support from MBIA Corp.
The developing outlook of MBIA Corp. reflects the meaningful uncertainty faced by MBIA Corp. and the potential that a global settlement between MBIA and Bank of America could lead to either an improvement or deterioration in the credit profile of the insurer, depending on the specific terms.
Rating Drivers — MBIA Insurance Corporation
Moody's cited the following factors that could lead to a rating upgrade for MBIA Insurance Corporation: a global settlement between Bank of America and MBIA that would leave MBIA Corp. solvent; substantial improvements in MBIA Corp.'s commercial real estate exposure that would limit its potential claims; a meaningful capital infusion into MBIA Corp.
Moody's cited the following factors that could lead to a rating downgrade for MBIA Insurance Corporation: inability to reach a global settlement with Bank of America that would leave MBIA Corp. solvent; regulatory intervention that could reduce or disrupt payment of claims, such as a payment deferral plan or rehabilitation, that would cause significant loss severity to policyholders incommensurate with the current rating.
Not affected by today's rating actions were MBIA UK Insurance Limited (insurance financial strength of B3, under review for downgrade) and National Public Finance Guarantee Corporation (MBIA National financial strength of Baa2, negative outlook).
The rating agency commented that the downgrade of MBIA Inc.'s senior debt to Caa1 reflects: the ongoing stress at MBIA Corp. and the risk of claims payment deferral or other regulatory action including potentially a rehabilitation or an insolvency proceeding, in the event that MBIA and Bank of America cannot reach a global settlement that would leave MBIA solvent; the credit linkage between MBIA Inc. and its MBIA Corp. subsidiary given the cross default provision in MBIA Inc.'s senior debt indentures. A rehabilitation proceeding at MBIA Corp. is an event of default; the limited liquidity at MBIA Inc. relative to potential debt repayments due under a possible cross default with MBIA Corp. At September 30, 2012, MBIA Inc. had $432 million of liquid assets and $897 million of senior notes outstanding; Bank of America's recent tender offer on one class of MBIA Inc.'s senior bonds which, if successful, could prevent MBIA from completing a consent solicitation that would have removed the cross default provision between MBIA Corp. and MBIA Inc.
The developing outlook of MBIA Inc., similar to the outlook on MBIA Corp., reflects the divergent possibilities for its credit profile over the near-to-medium term.
Moody's cited the following factors that could lead to a rating upgrade for MBIA Inc.: a successful consent solicitation from MBIA that would further delink MBIA Inc. from its MBIA Corp. subsidiary; a material strengthening of MBIA Inc.'s liquidity through dividends and/or potential capital raises; a global settlement between MBIA and Bank of America that would leave MBIA Corp. solvent.
Moody's cited the following factors that could lead to a rating downgrade for MBIA Inc.: further deterioration at MBIA Corp. that increases the risks of an insolvency proceeding; a successful tender offer by Bank of America that would keep the cross default provisions in debt indentures; further deterioration of MBIA Inc.'s liquidity.
Moody's ratings on securities that are guaranteed or "wrapped" by a financial guarantor are generally maintained at a level equal to the higher of the following: a) the rating of the guarantor (if rated at the investment grade level); or b) the published underlying.
In light of the downgrade to Caa2 and developing outlook of MBIA Insurance Corp.'s rating, Moody's will adjust the rating of securities wrapped by MBIA Corp. based on the approach discussed above.
The following ratings have been downgraded:
MBIA Inc. — senior unsecured debt to Caa1 developing, from B2
MBIA Insurance Corporation: Insurance financial strength to Caa2 developing, from B3; surplus notes to C (hyb) from Caa3 (hyb) ; and preferred stock to C (hyb) from Ca (hyb)
MBIA Mexico S.A. de C.V. — insurance financial strength to Caa2 developing, from B3; and national scale insurance financial strength to Caa2.mx developing, from B1.mx
The last rating action was on 19 December 19 2011 when Moody's downgraded MBIA Inc. to B2.