MBI - MBIA Inc.

[txlaw]

So here's an excerpt from the CC:

 

Arun N. Kumar - JP Morgan Chase & Co, Research Division

 

Okay. A couple of other questions. One, you noted that 24% of your bondholder is pursuant to the indentures you've identified and got approval from. Do you have any idea who the other bondholders may or may not be?

C. Edward Chaplin - President, Chief Financial Officer, Chief Administrative Officer, Vice Chairman of Mbia Insurance Corporation and Chief Financial Officer of Mbia Insurance Corporation

 

We have done some research into the holders of the bond, so we are contacting all of them.

Arun N. Kumar - JP Morgan Chase & Co, Research Division

 

But you do not have to publicly disclose them, I would think?

C. Edward Chaplin - President, Chief Financial Officer, Chief Administrative Officer, Vice Chairman of Mbia Insurance Corporation and Chief Financial Officer of Mbia Insurance Corporation

 

No, no.

 

The question in mind is whether MBIA would have anticipated this sort of maneuver by BofA before putting out the solicitation, and whether or not those other people (not Fairholme) they've done research into also hold MBIA common such that they would benefit more from MBIA's solicitation vs. BofA's offer over the long run.

 

If this is the case -- and it's a big if -- MBIA might have believed that it would get bondholder approval before it launched the solicitation.

 

I wonder whether Warburg Pincus owns any MBIA debt. 

[glider3834]

Lets assume BAC are successful, it is certainly not game over for MBIA.

 

A further cash injection into MBIA Corp would be needed and they could do this through a rights issue or other equity/debt offer. I think this debt offer move strikes of desperation for BAC, they want to settle for as little as possible with MBIA.

 

MBIA are still sitting on a ABV of $30 a share. Even with a dilutive rights issue, the shares would at current levels still trade substantially below ABV. MBIA's case against BAC is strong & I think they have a very, very high chance of success in the put back & reps litigation as well as Article 78 case.

 

MBIA are not going to accept a settlement with a gun held to their heads, they are more likely to seek other ways to shore up their financial situation at MBIA Corp and continue their litigation against BAC.

[glider3834]

http://www.thestreet.com/story/11766467/2/bank-of-america-wins-a-battle-but-mbia-can-win-the-war-street-whispers.html

 

interesting comments by Mark Palmer at end of the article

[JRH]

Lets assume BAC are successful, it is certainly not game over for MBIA.

 

A further cash injection into MBIA Corp would be needed and they could do this through a rights issue or other equity/debt offer. I think this debt offer move strikes of desperation for BAC, they want to settle for as little as possible with MBIA.

 

I wouldn't call it desperation, exactly.  I am probably a broken record but I say it's just game theory on BAC's part.  BAC's actions imply they think it is possible they will lose in court.  If anything, the response from MBIA yesterday evening is the one that seemed emotional.

 

One strategy MBIA could use is to allow BAC to buy up that tranche, while getting the consent solicitation on the other tranches.  After both offers had expired (assuming BAC gets majority of theirs, the other tranches get the consent), they could replace the BAC tranche.  Sounds like it would be expensive (http://mbibaclitigtion.blogspot.com/2012/11/mbia-v-bank-of-america-litigation-goes.html), but it's probably cheaper than allowing BAC to extort a settlement that drains directly from corporate equity value.

 

Unless I'm missing something, this unbinds MBI from being cornered by BAC's strategy.

[ERICOPOLY]

I guess I'll just state the obvious here and say that the Article 78 ruling has been delayed until MBIA corp can show it has the liquid means to survive as a separate entity.

 

Having a big legal receivable isn't enough for the judge -- she wants to see enough of it monetized to be comfortable making a ruling.

 

So BAC has given MBIA a settlement offer that satisfies the judge enough to approve the split, but is way less than MBIA thinks it will get in trial.

 

So then MBIA shows it doesn't need the settlement/liquidity after all because it can do the bond consent solicitation thing.

BAC then counters with this new stunt.

 

The next move for MBIA is to raise new debt funding and retire BAC's callable bonds at a steep premium.  Presumably they can then get the Article 78 ruling, unless BAC's stunt has influenced the judge's opinion on the strength of the MBIA subsidiary in the absence of a settlement with BAC.

 

I'm just trying to see if I understand it correctly.  Am actually considering swapping a bit of the BAC for MBIA again.  MBIA is roughly where BAC was last year when I swapped, and BAC is roughly where MBIA was.

 

 

[Kraven]

I guess I'll just state the obvious here and say that the Article 78 ruling has been delayed until MBIA corp can show it has the liquid means to survive as a separate entity.

 

Having a big legal receivable isn't enough for the judge -- she wants to see enough of it monetized to be comfortable making a ruling.

 

So BAC has given MBIA a settlement offer that satisfies the judge enough to approve the split, but is way less than MBIA thinks it will get in trial.

 

So then MBIA shows it doesn't need the settlement/liquidity after all because it can do the bond consent solicitation thing.

BAC then counters with this new stunt.

 

The next move for MBIA is to raise new debt funding and retire BAC's callable bonds at a steep premium.  Presumably they can then get the Article 78 ruling, unless BAC's stunt has influenced the judge's opinion on the strength of the MBIA subsidiary in the absence of a settlement with BAC.

 

I'm just trying to see if I understand it correctly.  Am actually considering swapping a bit of the BAC for MBIA again.  MBIA is roughly where BAC was last year when I swapped, and BAC is roughly where MBIA was.

 

How you have laid things out may in fact be true.  From the judge's standpoint I would say the larger issue is she doesn't want to issue a judgment.  That much is pretty clear.  It's been a while.  She wants a settlement.  Judges don't like putting themselves out there in situations like this.  Say she approves it and for whatever reason MBIA goes down the tubes in 2013.  She will be blamed.  She can't hold it up forever, but she doesn't want to do it.

 

Given that MBIA has a receivable for around $3.2 bil on their balance sheet it would seem that they are pretty confident they can get that.  They don't and on top of everything they have a huge write off too.  I would think their accountants would want some sort of "proof" that $3.2 bil is doable.

 

If MBIA raises new debt and retires the 2004 bonds, it wouldn't be at a steep premium.  BAC is offering a steep premium to the current price, but MBIA still owes par.  So it's fungible in that respect from MBIA's standpoint, although it would seem they would have to pay a higher interest rate so they would take a hit going forward on that basis, although it isn't clear to me what the differential would be.

 

It's a very odd situation all around.  MBIA is being stubborn beyond belief and so is BAC.  I've never seen a major bank play such hardball as BAC is doing either.  This is one for the ages and will make a good book.  What is pretty clear though is that BAC is worried.  They are willing to pay an extra $100 mil + to ensure the consent solicitation doesn't go through.  That offers some protection for their CMBS and some additional bargaining pressure on MBIA, but if MBIA retires the debt they are in the exact same situation they were 2 days ago. 

 

I don't see how MBIA doesn't come out of this in good to great shape.  BAC?  This is small potatoes either way and an extra billion here or there doesn't matter at all.  Status quo for them.  I continue to think though BAC would be far better served paying an extra few bucks and making this all go away.  They could spin it as putting the past where it belongs and moving forward.

[onyx1]

I guess I'll just state the obvious here and say that the Article 78 ruling has been delayed until MBIA corp can show it has the liquid means to survive as a separate entity.

 

Having a big legal receivable isn't enough for the judge -- she wants to see enough of it monetized to be comfortable making a ruling.

 

So BAC has given MBIA a settlement offer that satisfies the judge enough to approve the split, but is way less than MBIA thinks it will get in trial.

 

So then MBIA shows it doesn't need the settlement/liquidity after all because it can do the bond consent solicitation thing.

BAC then counters with this new stunt.

 

The next move for MBIA is to raise new debt funding and retire BAC's callable bonds at a steep premium.  Presumably they can then get the Article 78 ruling, unless BAC's stunt has influenced the judge's opinion on the strength of the MBIA subsidiary in the absence of a settlement with BAC.

 

I'm just trying to see if I understand it correctly.  Am actually considering swapping a bit of the BAC for MBIA again.  MBIA is roughly where BAC was last year when I swapped, and BAC is roughly where MBIA was.

 

How you have laid things out may in fact be true.  From the judge's standpoint I would say the larger issue is she doesn't want to issue a judgment.  That much is pretty clear.  It's been a while.  She wants a settlement.  Judges don't like putting themselves out there in situations like this.  Say she approves it and for whatever reason MBIA goes down the tubes in 2013.  She will be blamed.  She can't hold it up forever, but she doesn't want to do it.

 

Given that MBIA has a receivable for around $3.2 bil on their balance sheet it would seem that they are pretty confident they can get that.  They don't and on top of everything they have a huge write off too.  I would think their accountants would want some sort of "proof" that $3.2 bil is doable.

 

If MBIA raises new debt and retires the 2004 bonds, it wouldn't be at a steep premium.  BAC is offering a steep premium to the current price, but MBIA still owes par.  So it's fungible in that respect from MBIA's standpoint, although it would seem they would have to pay a higher interest rate so they would take a hit going forward on that basis, although it isn't clear to me what the differential would be.

 

It's a very odd situation all around.  MBIA is being stubborn beyond belief and so is BAC.  I've never seen a major bank play such hardball as BAC is doing either.  This is one for the ages and will make a good book.  What is pretty clear though is that BAC is worried.  They are willing to pay an extra $100 mil + to ensure the consent solicitation doesn't go through.  That offers some protection for their CMBS and some additional bargaining pressure on MBIA, but if MBIA retires the debt they are in the exact same situation they were 2 days ago. 

 

I don't see how MBIA doesn't come out of this in good to great shape.  BAC?  This is small potatoes either way and an extra billion here or there doesn't matter at all.  Status quo for them.  I continue to think though BAC would be far better served paying an extra few bucks and making this all go away.  They could spin it as putting the past where it belongs and moving forward.

 

If I read the 2004 docs correctly, the make whole is T+15 to maturity in 2034.  Thats about a 40 point premium MBI would need to pay to call the 5.7% bonds.  This would add 130mm in debt to the parent if they issued additional debt, and the coupon would likely be in excess of 8%.  This route doesn't seem to provide MBI with an easy way out. 

 

BAC can control the 2004 issue with a majority ownership.  $330mm * 51% * 35 points means they can be sucessful with as little at $60mm. 

 

 

[Kraven]

 

If I read the 2004 docs correctly, the make whole is T+15 to maturity in 2034.  Thats about a 40 point premium MBI would need to pay to call the 5.7% bonds.  This would add 130mm in debt to the parent if they issued additional debt, and the coupon would likely be in excess of 8%.  This route doesn't seem to provide MBI with an easy way out.

 

That's what I get for not checking the underlying docs.  If you're right about the terms, then you're right that it's not an easy way out.

[PlanMaestro]

Nice premium on the $6 puts.

[ERICOPOLY]

Why would any of the bondholders who also owns the common approve the action that MBI is asking for?

 

Why not act in your own self interest to wait for MBI to call your bonds at the big premium we're discussing.  The cost of that premium is diluted amongst your fellow common shareholders, so you win overall.

 

By now they all realize this, if not already then thanks to BAC.

[Grenville]

Why would any of the bondholders who also owns the common approve the action that MBI is asking for?

 

Why not act in your own self interest to wait for MBI to call your bonds at the big premium we're discussing.  The cost of that premium is diluted amongst your fellow common shareholders, so you win overall.

 

By now they all realize this, if not already then thanks to BAC.

 

It prevents a liquidity event on the hold co from bond holders through cross default on mbia corp. National doesn't have the liquidity issue. The article below probably does a better job of explaining it.

 

http://dealbreaker.com/2012/11/you-fight-with-bank-of-america-over-bad-mortgages-bank-of-america-fights-back/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dealbreaker+%28Dealbreaker%29

Link from Plan

 

Common share holders don't want a liquidity event forcing MBIA's hands in the settlement talks with BAC. They want the put back claim receivables paid, because a decent amount of upside comes from that.

[ERICOPOLY]

Why would any of the bondholders who also owns the common approve the action that MBI is asking for?

 

Why not act in your own self interest to wait for MBI to call your bonds at the big premium we're discussing.  The cost of that premium is diluted amongst your fellow common shareholders, so you win overall.

 

By now they all realize this, if not already then thanks to BAC.

 

It prevents a liquidity event on the hold co from bond holders through cross default on mbia corp. National doesn't have the liquidity issue. The article below probably does a better job of explaining it.

 

http://dealbreaker.com/2012/11/you-fight-with-bank-of-america-over-bad-mortgages-bank-of-america-fights-back/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dealbreaker+%28Dealbreaker%29

Link from Plan

 

Common share holders don't want a liquidity event forcing MBIA's hands in the settlement talks with BAC. They want the put back claim receivables paid, because a decent amount of upside comes from that.

 

There isn't a liquidity event if the company raises new bonds -- enough to pay for the premium necessary to call the bonds.

 

So what I'm saying is... even if BAC hadn't done this latest move, why were the bondholders willing to give their consent instead of forcing the bonds to be called at a premium?

 

That way you have your bonds paid off at a premium, the ring fence is in place, and you still can put BAC to trial for Countrywide and get a big settlement.  Yes, your common is worth a bit less due to the expensive cost of retiring those bonds, but you come out ahead because that cost is born amongst all of the shareholders.

 

[ERICOPOLY]

But anyways, I figure somehow I must be wrong if the bondholders wanted to instead give their consent.

[Grenville]

I don't know MBIA's financials that well, but I don't think they have the cash to call the bonds. They could raise more capital and go that route but in order to call the bonds they need to pay a premium to par to call them early.

 

from the 2004 prospectus:

The notes will be redeemable prior to maturity, at our option, in whole or in part, at any time (a “Redemption Date”), at a redemption price equal to the greater of:

 

Ÿ 100% of the aggregate principal amount of the notes to be redeemed; and

 

Ÿ an amount equal to the sum of the present values of the remaining scheduled payments for principal and interest on such notes, not including any portion of the payments of interest accrued as of such Redemption Date, discounted to such Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, plus 15 basis points

[ERICOPOLY]

I don't know MBIA's financials that well, but I don't think they have the cash to call the bonds. They could raise more capital and go that route but in order to call the bonds they need to pay a premium to par to call them early.

 

from the 2004 prospectus:

The notes will be redeemable prior to maturity, at our option, in whole or in part, at any time (a “Redemption Date”), at a redemption price equal to the greater of:

 

Ÿ 100% of the aggregate principal amount of the notes to be redeemed; and

 

Ÿ an amount equal to the sum of the present values of the remaining scheduled payments for principal and interest on such notes, not including any portion of the payments of interest accrued as of such Redemption Date, discounted to such Redemption Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, plus 15 basis points

 

Exactly!

 

The premium to par is what you earn as a bondholder if you choose to force their hand and call your bonds early.  So why give them your consent?

 

They call the bonds using cash from a new bond issue.

 

I know that's financially not optimal for the common shareholders (to say the least), but as the bondholder you get all of that premium for yourself and you share the cost of it with your fellow common shareholders. 

 

But maybe the almost certain higher interest cost from the new bond issue would make it not worth your while if you owned enough of the common vs how many bonds you owe.

 

Gain on being called on the bonds would have to exceed your pro-rata share of pain it puts on the common.

 

EDIT:  However you might also be the new owner of the newly issued bonds at the higher interest rate, in which case you wouldn't be losing out at all.  It might just be executed as a bond swap (admitted I'm a bit ignorant of how these things are really done).

[Grenville]

Yeah, I'm sure there are some other wrinkles, but that makes sense.

 

One data point is that Berkowitz has given his consent with the lock up and we know he owns the common.

[ERICOPOLY]

Yeah, I'm sure there are some other wrinkles, but that makes sense.

 

One data point is that Berkowitz has given his consent with the lock up and we know he owns the common.

 

Berkowitz's bonds and common are concentrated in different funds.  He's got the "focused" fund stuffed with common, and he's got the "income" fund stuffed with bonds.  He's got to pick a winner and a loser here.

 

His allocation mix between the different funds might explain why he is playing this out this way -- meaning his granting of consent might have been unexpected by BAC's strategists.

 

 

[ERICOPOLY]

And what does Berkowitz do now that BAC is offering him a big price for those bonds?

 

Does he choose:

 

A)  not sell them to BAC and screw the Fairholme Focused Income holders out of a big bonanza

B)  sell them to BAC and have his Fairholme Allocation Fund suffer the pain of the common shareholders.

 

One fund has only the common.

One fund has only the bonds.

 

Pick a winner.

[Grenville]

And what does Berkowitz do now that BAC is offering him a big price for those bonds?

 

Does he choose:

 

A)  not sell them to BAC and screw the Fairholme Focused Income holders out of a big bonanza

B)  sell them to BAC and have his Fairholme Allocation Fund suffer the pain of the common shareholders.

 

One fund has only the common.

One fund has only the bonds.

 

Pick a winner.

 

Can he back out of the lock-up on the consent solicitation?

[JRH]

Can he back out of the lock-up on the consent solicitation?

 

I don't think he owns any of the tranche that BAC made the offer on.  Wonder why they chose that tranche... ;)

[Grenville]

Can he back out of the lock-up on the consent solicitation?

 

I don't think he owns any of the tranche that BAC made the offer on.  Wonder why they chose that tranche... ;)

 

He owns 11.58mln principal in the Fairholme Fund

http://www.fairholmefunds.com/sites/default/files/352975_051.pdf

[ERICOPOLY]

If I read the 2004 docs correctly, the make whole is T+15 to maturity in 2034.  Thats about a 40 point premium MBI would need to pay to call the 5.7% bonds.  This would add 130mm in debt to the parent if they issued additional debt, and the coupon would likely be in excess of 8%.  This route doesn't seem to provide MBI with an easy way out. 

 

Question: 

How much does that affect the credit ratings of the parent?

Does that in turn have a negative impact on National, even if the split were approved?

 

In other words, would the parent have to issue some (even more costly) dilutive equity?

 

[mpauls]

Look,

 

(i) BAC has no interest in bankrupting MBIA. 

Who knows what exactly started this tit-for-tat, but MBIA must have considered that BAC would respond the way they did, and BAC must have considered MBIA might try this at some stage. 

 

(ii) MBIA does not have a liquidity problem right now. 

MBIA has some $325mil-ish in cash and liquid investments on hand.  BAC knows the only way to squeeze MBIA is by squeezing their liquidity position and the only way they can (indirectly) facilitate this is by screwing around with Lacrosse Financial-MBIA entity responsible for 6.15bn of the $9.1bn CDS exposure (the difference being the first loss amount, which some refer to as a deductible). 

 

My guess is that MBIA is afraid that "someone" might try to accelerate losses by liquidating certain reference obligations or similar.  Begs all kinds of other questions, but if MBIA is to have liquidity problems, this is where it will take place.  It's a fine line though for BAC if they try to play this card, bc they want to squeeze it but they don't want it to pop.

 

Moreover:

MBIA want BAC to commute the remaining exposures (namely the 6.15bn CMBS exposures) for free (They apply the same logic as with putbacks).  If you are BAC you want a fair price for these expected losses.  So the question is what is a fair price for exposure of 6.15bn a portion of which is probably foreseeable? There are also commutations for remaining RMBS exposures, when you add these up, it's easy to see BAC wanting ~2-3bn to commute.  If MBIA gets 3bn in putbacks it's almost net $0, which probably doesn't fly with MBIA.  Given we are so close to trial, MBIA probably feel that they have the upper hand-which is the big disconnect between what "the markets" think and what is probably the case.  Of course BAC can continue to squeeze, but at what point does the regulator jump in?  So on the one hand they can squeeze, but they don't know how hard is too hard and on the other hand they don't want this thing to go to trial. 

 

Settle for more than you want to pay, or tighten the squeeze as we approach court decisions but risk having the whole thing blow up?

[ERICOPOLY]

Look,

 

(i) BAC has no interest in bankrupting MBIA. 

 

(ii) MBIA does not have a liquidity problem right now. 

 

 

I don't think bankruptcy is even in question.

 

I think a ruling on the split is in question.

 

There is no bankruptcy on the table because if that were the likely outcome then the split would not get approved by the judge.

[mpauls]

As far as I'm concerned there are no questions regarding the split.  They'll probably settle before Kapnick rules.  If she does rule its gotta be in MBIAs favor.