MBIA’s $1.8 Billion SIV Having Funding Trouble

Bloomberg reported that an SIV, called Hudson-Thames Capital Ltd., operated by a subsidiary of MBIA, the world’s largest bond insurer, was having trouble securing funding. Note that Hudson-Thames has not yet breached any financial tests.

MBIA has only a modest financial exposure, $15.8 million of capital notes; the bigger issue is the possible damage to MBIA’s reputation. If MBIA has any interest in continuing to sponsor investment vehicles, it may need to assist Hudson-Thames.

MBIA also reported its first quarterly loss due to markdown of the value of mortgage debt it guarantees. If MBIA believes that further losses of this sort may be on the horizon, it may step back from Hudson-Thames because it simply cannot afford the rescue if the assets it has guaranteed continue to deteriorate. Maintaining a AAA rating is imperative for MBIA.

From Bloomberg:

MBIA Inc., owner of the world’s largest bond insurer, said a $1.8 billion structured investment vehicle it runs through its asset management business is having trouble raising money and is seeking funding alternatives.

MBIA has invested $15.8 million in the capital notes of Hudson-Thames Capital Ltd. and said it has no obligation to provide the SIV with liquidity support or guarantees. MBIA today reported its first quarterly loss ever after marking down the value of mortgage-related debt it guarantees by $342.1 million.

SIVS sell commercial paper to finance purchases of longer term securities, leading to a funding crisis over the last month as money market investors refused to buy securities that could be backed by subprime mortgages. Financial institutions such as MBIA that created SIVs could damage their reputation if they fail to fully repay investors, said Sean Egan, managing director of Egan- Jones Ratings Co., an investor-compensated rating company in Haverford, Pennsylvania.

“MBIA has franchise risk,” said Egan. As the owner of the world’s largest AAA rated bond insurance company, “MBIA is in the business of selling confidence,” he said.

MBIA shares fell $10.84, or 20 percent, to $44.35 in trading on the New York Stock Exchange as of 1:35 p.m….

“Like many other SIVs, Hudson-Thames has been challenged by the dislocation in the markets,” said Chuck Chaplin, Chief Financial Officer of Armonk, New York-based MBIA, during a conference call.

MBIA’s diversification into investment management was deemed a “low risk” strategy in a report by Moody’s Investors Service last year. Moody’s bond insurance analysts in New York declined to answer questions on the risk Hudson-Thames may pose to the MBIA.

“There may be a market perception of reputation risk” related to MBIA’s asset management business, said David Veno, a bond insurance analyst with Standard & Poor’s in New York. “Yet, the underperformance of a SIV would have no impact on the rating of MBIA.”

The SIV is a separately capitalized entity and MBIA has neither guaranteed the performance of the commercial paper nor promised to provide other financial assistance, he said.

MBIA earns fees managing Hudson-Thames and is a minority investor, according to its annual filing with the Securities and Exchange Commission.

One risk of running a SIV is that it may call into question management’s ability to oversee other investments and risks, said Mark Adelson, a structured-finance consultant with Adelson & Jacob Consulting LLC in New York.

“If a bank blows up a SIV, no one’s ever going to buy anything off-balance sheet from it again,” said Adelson.

SIV’s aren’t fully backed by liquidity lines from banks like other forms of so-called asset backed commercial paper. Instead, they mark their assets to reflect market values and begin to sell securities and reduce leverage if values fall.

An unprecedented decline in the value of highly-rated securities held by SIVS has meant some of the funds may take losses, Moody’s analysts said during a conference call last month….

“So far Hudson-Thames is not breaching any of its tests,” Paul Kerlogue, a Moody’s analyst in London who covers the structured finance market, said in an interview earlier this month. “As long as it’s able to continue financing, it most likely won’t.”

Hudson-Thames is relatively small and hadn’t had time to expand its SIV before the crisis hit, Kerlogue said.

Hudson-Thames can sell up to $42 billion of securities including commercial paper to invest in assets with the equivalent of a Baa3 rating from Moody’s and a maturity of less than 35 years, according to a December 2006 report.

MBIA’s investment management income tripled to $120 million in 2006 from $48 million in 2004. It accounted for 11 percent of the company’s before-tax income from continuing operations in 2006 compared with 4 percent in 2004.

MBIA oversees assets of $67 billion through its asset management business, according to its Web site.

Gary Dunton, MBIA’s chief executive officer and chairman, said during a presentation to investors on Sept. 4 in New York that the company’s asset management business would provide a growing source of profits.

“With the exception of our SIV business, prospects remain bright,” said Dunton.

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