naked capitalism

To be clear, MBI, still rated AA by Standard & Poor’s, and Aa2 by Moody’s, is issuing a hybrid (fixed for five years, then floats) at a yield of 14%, which is consistent with a company at risk of bankruptcy.

Note that this deal got off only after investors forced a repricing (hat tip Steve A). As Reuters had reported yesterday, MBIA had initially offered these surplus notes on Thursday, with an expected coupon of 9% to 12%, which was already double the coupon of comparably rated bonds.

From Bloomberg:

MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers….

“Obviously, there are problems in wonderland,” said Alan Kral, managing director of Trevor Stewart Burton and Jacobsen, a New York-based investment adviser with $750 million under management, including shares of MBIA.

MBIA needs the money to bolster capital and stave off a reduction in its insurance unit’s top credit rating. Fitch Ratings gave MBIA until the end of the month to raise at least $1 billion. A loss of the rating would cripple MBIA’s business of insuring debt.

MBIA said this week it would sell the notes and cut its dividend 62 percent to help increase its capital. In December, the company said private equity firm Warburg Pincus LLC would invest $1 billion in the Armonk, New York-based company…..

The $1 billion of 25-year hybrid bonds will pay a fixed rate until 2013, when, if not called, they will begin to float. Surplus notes are bonds issued by insurance companies that state insurance regulators consider equity.

Moody’s Investors Service gave the debt an Aa2 rating, two levels below MBIA’s insurance company, and Standard & Poor’s ranked it an equivalent AA.

Under the terms of the notes, MBIA can only make interest or principal payments with the blessing of the New York State Insurance Department, according to a preliminary prospectus.

MBIA’s yield is equivalent to 956 basis points higher than U.S. Treasuries of a similar maturity. The extra yield, or spread, on investment-grade bonds is 217 basis points, according to Merrill Lynch index data. The premium to own high-yield, or junk-rated, debt is 663 basis points. A basis point is 0.01 percentage point.

“That would be close to distressed levels,” said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. Distressed bonds trade at 1,000 basis points over Treasuries of similar maturity.

MBIA, down 80 percent in the past 12 months before today, jumped $2.61, or 18 percent, to $16.72 at 1:37 p.m. in New York Stock Exchange composite trading. Marty Whitman’s Third Avenue Management LLC more than doubled its stake in the company to 10.98 percent, according to a regulatory filing yesterday.

Earlier this week, MBIA said it expects to take fourth- quarter markdowns totaling $3.3 billion on its guarantees of securities based on home loans made to borrowers with poor credit.

“It’s clearly a troubled company,” said William Featherston, managing director in high yield at J. Giordano Securities LLC in Stamford, Connecticut.