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MBIA To Receive $1 Billion Equity Infusion From Warburg Pincus

Bloomberg reports that monoline bond insurer MBIA, which was at risk of a ratings downgrades due to having guaranteed mortgage-related debt, has gotten a stay of execution in the form of an equity investment by private equity firm Warburg Pincus.

While no rating agency has yet confirmed that this capital infusion will be sufficient to forestall a downgrade, the rating agencies were doing everything possible to avoid downgrading the large monolines (and MBIA is the biggest) because the knock-on effects would be considerable. Whether this purchase will be sufficient for the long haul remains to be seen. Some analysts are openly skeptical.

From Bloomberg:

MBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will raise as much as $1 billion by selling a stake to private equity firm Warburg Pincus LLC…..Warburg Pincus will buy $500 million of common stock and take up to $500 million in a shareholder rights offering next quarter, Armonk, New York- based MBIA said today.

The added capital may help avoid a cut in MBIA’s AAA credit rating, which is under scrutiny by Moody’s Investors Service, Fitch Ratings and Standard & Poor’s. MBIA stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA stamp would endanger those ratings. Without the top ranking, MBIA may be unable to guarantee debt, a business that made up 90 percent of revenue last year.

“It’s a positive for the company,” said Rob Haines, an analyst at CreditSights Inc., a New York-based independent bond research firm. While not a “magic bullet,” the capital infusion may stave off a downgrade for now, he said.

Fitch analyst Thomas Abruzzo stopped short of affirming MBIA’s credit rating in a statement today. Fitch will weigh the capital infusion against the added losses and make a decision next week, Abruzzo said. David Veno, a bond insurance analyst at S&P, and Stanislas Rouyer, at Moody’s, didn’t immediately return calls seeking comment.

MBIA is among at least eight bond insurers being scrutinized by the ratings companies. The industry guarantees $2.4 trillion of debt and downgrades could cause losses of as much as $200 billion based on falling values of the debt and increased borrowing costs, according to data compiled by Bloomberg.

Writedowns of the value of the debt MBIA guarantees will exceed the $342 million in the third-quarter and the company will set aside as much as $800 million to cover losses it expects to take on securities backed by home equity loans, MBIA said…

Warburg Pincus, the New York-based firm started in 1971, will initially buy 16.1 million common shares at $31 each. The firm will also receive seven-year warrants to buy stock at $40 and have the right to appoint two directors. Warburg Pincus has $2.7 billion in financial-services investments include Bermuda- based insurers Aeolus Re Ltd. and Arch Capital Group Ltd., and Dime Bancorp, the New York-based parent of the Dime Savings Bank.

MBIA said it still may consider other ways to boost capital, including reinsuring its portfolio or issuing debt or hybrid securities.

MBIA’s top executives, who include Chief Executive Officer Gary Dunton, said they also will buy $2 million of stock at $31.

Credit-default swaps tied to MBIA dropped 95 basis points to 330 basis points, the lowest since Oct. 30, according to CMA Datavision in London. A decline in the contracts, used to speculate on the company’s ability to repay its debt, signals improvement in investor confidence. Contracts tied to MBIA’s AAA rated bond insurer, MBIA Insurance Corp., narrowed 37 basis points to 155 basis points, CMA data show.

Shares of New York-based Ambac Financial Corp., whose debt ratings are also under examination, jumped $2.74, or 10 percent, to $29.58. Ambac, the second-largest bond insurer, is also rated “likely” to need capital by Moody’s…..

MBIA’s announcement of more losses to come raised concerns among analysts that the company may need even more capital.

“The capital raise clearly takes the near-term pressure off MBIA, from a ratings perspective,” Ken Zerbe, an analyst at Morgan Stanley in New York, said in a report to clients. “That said, the size of the expected case loss reserve and the anticipated mark-to-market loss are much greater than expected and bode poorly for the health of the financial guaranty industry.”

Zerbe advises investors avoid financial guarantee stocks for now.

MBIA in October posted a $36.6 million loss because of writedowns on mortgage-related securities and halted stock buybacks to retain capital. So far this quarter, the company “has observed a further widening of market spreads and credit ratings downgrades of collateral underlying certain MBIA-insured CDO tranches,” the company said in today’s statement.

The fair value of the assets slumped by about $850 million in October, MBIA said.

The added losses and capital being set aside for home equity loans may sap the capital being raised, Gimme Credit analyst Kathleen Shanley wrote in a note to clients today.

Egan-Jones Ratings Co. called the $1 billion of capital raising plans “a pittance.” The firm has estimated that MBIA needs to raise about $4 billion of capital. Managing director Sean Egan said that estimate would likely increase given MBIA’s disclosure about expected losses on home equity loan backed securities.

“Given the magnitude of MBIA’s exposures, as demonstrated again this morning with UBS’s writedowns, I don’t see how $1 billion moves the needle,” said David Einhorn, president of Greenlight Capital LLC in New York, which has a short position on MBIA, betting the shares will decline.

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6 comments

  1. doc holiday

    Re: MBIA in October posted a $36.6 million loss because of writedowns on mortgage-related securities and halted stock buybacks to retain capital. So far this quarter, the company “has observed a further widening of market spreads and credit ratings downgrades of collateral underlying certain MBIA-insured CDO tranches,” the company said in today’s statement.

    >> $36.6 was what they recognized, but as we saw in the dotcom era, these things take time to unfold

  2. doc holiday

    Date: 23-APR-07
    Delivery: Immediate Online Access
    Author:

    Article Excerpt
    CHICAGO — Fitch Ratings announced today the formal launch of Prism, its ‘next generation’ insurance industry economic capital model. Fitch believes the launch of Prism will change how risks should be viewed in the insurance industry by third parties, such as brokers, bankers, investors and rating agencies.

    Prism will now form an integral part of Fitch’s rating analysis, beginning with reviews of yearend 2006 financial information. A special report, to be published Tuesday, April 24, will reveal aggregated industry results from its ‘beta testing’ of Prism using 2005 yearend data. Company-specific Prism scores will be disclosed later this spring.

  3. doc holiday

    Re: The diversification benefit under Prism allows insurer capital requirements within each regional Prism model to typically decline between 20% and 40%. The incremental diversification benefit for the aggregation of risks across sectors and countries is approximately between 3% and 10%.

    The agency reiterates that the assessment of insurers’ in-house capital models is a key part of its capital assessment methodology. Fitch’s view on capitalization will be influenced by the transparency and robustness of the in-house capital model used, together with Fitch’s assessment of the insurer’s enterprise risk management (ERM) framework. That said, Fitch believes its aggregation framework provides an excellent basis to discuss with companies their unique approaches to aggregation

    I never have seen a model that is sustainable or valuable; too bad Fitch had so much trouble with rating subprimes over the last 4 years…..who could have seen that valuations were out of control……Moody’s didnt see it either, or S&P, what a mystery that all the previous models failed yet agins, just after they had been upgraded after Enron hearings……hmm?

  4. doc holiday

    Fears of further multibillion-dollar writedowns from US sub-prime mortgage investments shook the City yesterday, as UBS took an additional $10 billion (£4.9 billion) hit and analysts said that November had been the worst month yet for banks.

    UBS wrote down $10 billion of investments in bad American debt and was forced to tap two new investors for a SwFr13 billion (£5.6 billion) injection to its tier 1 capital. The world’s largest wealth manager warned shareholders that it was likely to make a full-year loss as it stripped them of their cash dividend.

    The writedown came after UBS tightened its models to mark-to-market mortgage-related investments. Marcel Rohner, the chief executive of UBS, said that there had been a “continuous deterioration” in the sub-prime market in November, “partly driven by increased homeowner delinquencies but mainly fuelled by worsening market expectations”.

    Other banks that gave loss estimates a month or more ago, before they were hit by the November downturn, may now have to revisit their own models. Analysts at Dresdner Kleinwort said: “We believe there is a non-trivial risk of further writedowns”. Another analyst said: “This means that there might be more writedowns in the fourth quarter for the entire industry”. Shares in UBS closed up 1.4 per cent at SwFr58.

    Better get yourself together darling….join the human race….. JL

  5. doc holiday

    Does this ring a bell for anyone??

    http://money.cnn.com/news/newsfeeds/articles/prnewswire/CLM130A10122007-1.htm

    Dec. 10 /PRNewswire-Firstcall/ — Evergreen Investments today announced that the Board of Trustees of the Evergreen Funds has approved the merger of the following funds (“Target Funds”) into Evergreen Municipal Bond Fund (EKEAX):

    — Evergreen Alabama Municipal Bond Fund (EALAX)
    — Evergreen Connecticut Municipal Bond Fund (ECTAX)
    — Evergreen Georgia Municipal Bond Fund (EGAAX)
    — Evergreen Maryland Municipal Bond Fund (EMDAX)
    — Evergreen New Jersey Municipal Bond Fund (ENJAX)
    — Evergreen New York Municipal Bond Fund (EOYAX)
    — Evergreen South Carolina Municipal Bond Fund (EGASX)
    — Evergreen Virginia Municipal Bond Fund (EGVRX)

    Evergreen Investments is the brand name under which Wachovia Corporation conducts its investment management business. Wachovia Global Asset Management is the brand name under which Evergreen Investments conducts sales and distribution business outside of the United States. Combined, the groups serve more than four million individual and institutional investors through a broad range of investment products. Led by 300 investment professionals, Evergreen Investments strives to meet client investment objectives through disciplined, team-based asset management. Evergreen Investments manages more than $285 billion in assets

    Just curious??

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