MBIA 14% Notes Fall 12% in One Week

MBIA’s already richly priced bonds declined 12% in the first week after issuance The issue had been priced as if MBIA were a distressed credit, even though it still has an AAA rating. How long can the rating agencies keep this charade going?

Per the decline, a reader who saw this before I did aptly said, “Can’t do that too many weeks in a row.”

From Bloomberg:

MBIA Inc.’s surplus notes have tumbled as much as 12 percent since they were sold last week on concern that the world’s largest bond insurer may need to tap investors for more money.

The AA rated debt fell as low as 88.5 cents on the dollar today, according to bond traders. That’s the equivalent of a yield of 18 percent, data compiled by Bloomberg show. The notes were trading at 97.5 cents yesterday, according to Bloomberg data.

MBIA raised $1 billion in the Jan. 11 offering to stave off a reduction in its AAA credit rating. While Fitch Ratings today affirmed the ranking, investors are concerned losses on subprime mortgage securities may grow, Peter Plaut, an analyst at Sanno Point Capital Management in New York, said today in an e-mail.

“The outlook for rising credit losses doesn’t bode well for the outlook for the financial guarantors and mortgage insurers in upcoming quarters,” Plaut said. “The rating agencies may also need to adjust ratings to reflect reality.”

Bond insurers are under pressure by ratings companies to raise capital after a slump in the value of the securitized debt they guaranteed. Fitch Ratings had given MBIA until the end of January to raise capital or face a reduction of its AAA rankings….

At 88.5 cents on the dollar, the yield to the call date is about 18 percent, or 15 percentage points more than Treasuries due in December 2012, Bloomberg data show. The debt priced at a spread of 11 percentage points….

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 said last week it faces losses and writedowns of more than $4 billion because of a slump in securities backed by mortgages given to borrowers with bad credit. MBIA is forced to add more capital to protect against losses as the credit quality of the securities it guarantees declines.

Standard & Poor’s, which sliced the ratings on 29 percent of subprime securities created in 2006, yesterday said it is changing its assumptions when assessing U.S. residential mortgage bonds, a decision that may lead to more downgrades and force bond insurers to put up more capital.

Credit-default swaps on MBIA, which itself sells protection against bond defaults, rose to the equivalent of 16 percent for one. For five-year coverage, sellers are seeking the equivalent of about 9 percent a year, according to CMA Datavision.

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  1. RK

    Although the economy may be undergoing a temporary pause, reservations at The Woodshed, always a hot ticked, have been harder to come by than ever. Greenspan could only get in because
    Kaufman had some pull. Bernanke has been a frequent guest. Thanks to some string puling by the monolines, Anonymous was recently admitted.
    I’m still angling for my reservation. I hear the thin watery gruel is fabulous.

  2. Will T

    William Ackman of Pershing Square Capital Management talked about MBIA on Bloomberg last Thursday. I highly recommend watching the interview.

    Bill Ackman on YouTube

    * MBIA’s numbers are presented net of reinsurance. About half of the reinsurance comes from Channel Re (rated AAA with $300 million capital)
    * MBIA helped set up ChannelRe in 2004 with a 17.4% ownership stake. ChannelRe provides reinsurance services exclusively to MBIA.
    * MBIA shifted their riskiest exposures to ChannelRe. ChannelRe expects $200 million in credit impairments from a $3.3 billion mark-to-market charge at MBIA.
    * $42.2 billion of MBIA’s reinsurance is from ChannelRe.
    * MBIA needs to raise in excess of $10 billion of capital, depending on circumstances.
    * If MBIA does not cut the dividend and cannot access cash held at its investment management subsidiary, they run out of cash at the end of this June. If they are able to access the cash, they run out of money by the end of this year.

    His presentation can be found here:

  3. Anonymous

    Has MBIA run out of cash yet? It is now August 17.

    If Bill Ackman says MBIA going to run out of cash, then it must be true – correct?

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