LOS ANGELES — Bond insurer MBIA Inc. announced on Tuesday that its subsidiary, MBIA Insurance Corp., was denied a request to make an interest payment on its surplus notes issued in a private placement in 2008.
In accordance with the New York Insurance Law and the Fiscal Agency Agreement governing the notes, any payment made must receive prior approval by the New York State Department of Financial Services.
MBIA said the department denied the request to make the payment on MBIA Corp.’s 14% fixed-to-floating rate surplus notes due 2033, which are subordinate to the company’s indebtedness, policy claims, and other creditor claims. The payment was scheduled for Tuesday.
The company also said that MBIA Corp. is not required to make the interest payment, under terms of the notes agreement, and that the non-payment does not constitute a default.
The Department of Financial Services had not yet responded to a request for comment on the denied request as of Tuesday afternoon.
According to documents filed with the Securities and Exchange Commission relating to the notes, “there are no guidelines or interpretations” as to the extent of the department’s discretion in determining whether the financial condition of MBIA warrants payments.
In a research report written by Harry Fong and Darren Marcus at MKM Partners, they said they believe the Department of Financial Services was “simply doing its job, which is to look out for the interest of policyholders, not surplus note holders.”
Fong is an executive director and Marcus is a vice president at MKM Partners, an institutional equity research, sales and trading firm.
“The DFS’s decision not to allow the interest payment may be interpreted by some to mean MBIA Corp.’s liquidity has indeed dwindled to more worrisome levels,” they wrote. “However, this should not come as too large a surprise given MBIA’s commentary on its most recent earnings conference call and the actions it has taken to switch the restricted subsidiary on both of its holding company bond indentures.”
According to their research note, MBIA Corp.’s approximately $67 million surplus note interest payment, which it will hold onto until they receive approval, represented approximately 17% of liquidity on September 30, 2012.
“There is no impact whatsoever to MBIA’s common shareholders or parent company debt holders,” the report said.
BTIG analyst Mark Palmer also wrote in a research note that he believes MBIA’s non-payment will have no material impact on MBIA’s equity, and the only way an event of default were to occur would be if MBIA Corp. were put into rehabilitation by the Department of Financial services.
BTIG is an institutional brokerage and fund services company.
Palmer also emphasized that the Department of Financial Service’s priority is to protect policyholders.
“In this case, the policyholders are both at MBIA Insurance, the unit that houses the 14% notes, and at the National Public Finance Guarantee Corporation, the company’s municipal finance unit, which has an intercompany loan to MBIA Insurance with a balance of $1.651 billion as of Sept. 30. Any cash that exits MBIA Insurance to fund a coupon payment is theoretically at the expense of policyholders at both units.”
Palmer wrote that he believes it is more likely than not that the Department of Financial Services will allow the payment to be made, noting that the company’s liquidity in its last report on Sept. 30 was $386 million — $57 million more than its liquidity of $329 million on March 31. That was before the company was allowed by the regulator to make its July 15 payment.
According to MBIA’s filing with the SEC on Tuesday, the deferred interest payment will be due on the first business day on or after which the company obtains approval to make the payment and no interest will accrue on the deferred interest.
Also on Tuesday, Standard & Poor’s lowered its rating on the surplus notes to C from CCC as a result of the nonpayment of interest.
“Our ‘C’ subordinated debt rating includes issues on which cash coupon payments have been deferred , eliminated, or in some cases paid in kind, as permitted under the terms of the issue,” the credit ratings report said.