While this move by MBIA to increase equity and reserves is hardly adequate to preserve an AAA based on what that rating is supposed to mean, the rating agencies, despite their posturing otherwise, are desperate to avoid downgrading MBIA and Ambac,. This fig leaf may be deemed to be adequate, at least for the next six to nine months. However, Fitch, which has taken a tougher stance than Moody’s and Standard & Poors, is more likely to issue a downgrade, irrespective of this development.
In a sign of the doubts surrounding MBIA, Warburg Pincus is having to backstop the planned sale of preferred stock. This is reminiscent of a trader doubling down, a strategy far more likely to blow up than succeed.
Note that the value of preferred stock presupposed that the preferred dividends will actually be paid. But MBIA is a holding company; the insurance subsidiaries are regulated entities and can upstream cash to the parent only to the extent they are profitable (and then only a percentage of profits is eligible to be dividended up to the parent) or if approved by the regulator.
Eric Dinallo, who is trying to orchestrate the bailout of the bond insurers, regulates MBIA. His priority is protecting the policyholders of the regulated subsidiaries, not the equity investors. Bill Ackman of Pershing Square has repeatedly forecast that MBIA’s holding company will become insolvent as early as June-July, and under a best case scenario, by the end of 2008.
I anticipate Warburg Pincus will wind up owning a lot of this paper.
MBIA Inc. said late Wednesday that it plans to raise $750 million selling new shares to prop up its struggling bond insurance business.
Private-equity firm Warburg Pincus, which has already invested in MBIA , will backstop the sale of 50.3 million new shares by agreeing to buy up to $750 million of preferred stock that may be converted into common stock later, subject to some conditions.
MBIA also said it added $100 million to reserves to cover probable losses on securities backed by prime, second-lien mortgages….
Several bond insurers have begun to lose AAA ratings, imperiling their business models. But some have been trying to keep their top ratings by raising new capital. MBIA has already borrowed $1 billion and a $500 million investment from Warburg closed in late January….
“This is good progress,” New York State Insurance Superintendent Dinallo said in a statement on Wednesday after MBIA’s announcement. “It’s the kind of transaction we’ve been discussing and encouraging.”…
Still, MBIA may still find it tough to maintain its AAA ratings, according to one leading agency.
Fitch said on Wednesday that it may cut MBIA’s AAA rating within four to six weeks because losses will increase materially from the bond insurer’s large exposure to structured finance CDOs, which topped $30 billion at the end of September.
Such losses could threaten MBIA’s AAA rating, regardless of how much capital the bond insurer raises, Fitch warned.