MBI - MBIA Inc.

[sampr01]

Hi Valuecfa

 

Any comments on MBI earnings?. Did Mbi book $1.7b in Q1. Thanks.

[mankap]

Liberty

In the latest Q1'13 presentation on MBIA website, Adjusted book value is shown as $30.

[HJ]

 

I think it all boils down to would you rather have the insurance, or not have it?

 

I've bought hundreds of millions in munis for my firm's clients, over the past year. I get at least 10 calls and countless emails a day from different dealers pitching their issues. I feel like i have a decent feel for the market and how it works now.

 

The vast majority of bond dealers and the purchasers on the other end of the phone/computer only talk about the credit rating, if its callable or a bullet, whether it is a GO or Rev, and if its a rev whether its insured...,what industry of muni it is, what the maturity and call dates are, the premium, and what YTW is and what the YTM is. Rarely does anyone even look at the Official Statement or any other continuing disclosures of the bond itself. Most buyers don't even look over the trading history of the bond before pulling the trigger.

 

(I certainly don't do this, but)-In fact you will find that many financial firms will even pass on the highest bid when selling a bond, b/c the dealer took you to a ball game, the strip club, or lunch one day. You ask for a bid request on a bond, despite their bid being 10 basis points light they get the business as a return of the favor. It happens every day at many of the largest firms all over the world...this is not really of relevance to this thread but it irks me.

 

Most buyers have limitations on buying only A rated or higher too for example. It really depends on the investment policy statement of the pension fund, charitable organization, or general client. The rating is everything in the bond world, whether the rating is well reasoned or not is another matter than sadly never comes into the typical conversation between the bond dealers and buyers. Part of the reason is that there is just not enough time in the day to analyze every muni bond purchased in great detail.

 

The rating is everything, and if MBIA can bump it higher or provide the extra comfort of the insurance it definitely has value. Will the muni market function without it? Sure. But it's an extra warm blanket that people do look for and pay extra for.

 

Before the crisis, if a bond is "shadow rated" A or AA, by slapping a AAA insurance around it, it gets a AAA rating, there is a meaningful difference between what the borrower would pay to borrow between a A and AAA rating.  Maybe 100 bps, and bond insurers look to capture a portion of that.  In the new environment, let's say National gets rated A, just like AGO, they would only bring value to a borrower who otherwise would be rated below A.  So now you are dealing with a shadow BBB risk to start with, and you are not charging a lot for it (going by AGO's number, they get 20 bps per annum on a generic deal).  But there is a reason the underlying is rated BBB, not AA to start with.  I've dealt with rating agencies in my prior life.  Moodys', for example rate to an expected loss of 2-3% for a BBB rated bond.  Their base case is that a portfolio of BBB rated bonds will suffer 2-3% loss over a generic 5-10 year period.  If you are going to insurer that risk, charging only for 20 bps running, and guarantee that it doesn't suffer a loss to the ultimate investor, are you sure you are charging enough?  Muni bond insurers like to make statements that no GO's has ever lost money even through the Great Depression.  I don't have statistics to challenge that.  We do know they are involved in the Jefferson County and Stockton cases.  We will find out soon enough if they will suffer any pain.  I checked back to Orange County, and ultimately the investors did suffer some loss, not huge, but at 100:1 leverage, it doesn't take a lot to put an insurer's solvency into question, yet again.  New York City in the 70's, by the way, there was no bond insurance back then.  It's one thing to hammer the evil big banks in mortgage cases, and demand every bad loans to be put back, because I was completely defrauded.  Another thing entirely to deal with the municipalities to say you need to triple your sewage rates so that I get paid back all my losses. 

 

I agree that they do bring certain value to the process, especially in a situation where most of the investors are retail, and people ought to pay them just for the possibility that in a bad situation, it's great to have an experienced hand to deal with the court system and municipalities, which is exactly the value they bring, by the way.  But with a A rating, in today's economic environment, they really need to fundamentally rethink their business model to charge for their service.  Cause as is I have a lot of doubt whether they charge enough. 

[Liberty]

Liberty

In the latest Q1'13 presentation on MBIA website, Adjusted book value is shown as $30.

 

Thank you, I saw that.

 

http://i.imgur.com/0GARwyt.png

 

I know I'm too late for the big pop on this one, but now that it's been significantly de-risked, I'm trying to figure out how much of a value gap there is left between what the market sees and what the IV range might be. Might be a smaller upside, but the dark clouds on the horizon are also a lot smaller it seems...

 

I've been re-reading this whole thread and want to thank everybody for their contributions. Truly amazing the work that has been done on this one. Too bad I'm not a good enough investor to have jumped in earlier, but I try to learn a bit every day :)

[valuecfa]

Question for the MBIA experts:

 

What are the main things you'll be wanting to hear about in tomorrow morning's call?

 

I'm thinking of listening in, and I'd love a cheat sheet  :D

 

Is it too early to hope to hear about plans to write new business at National? Something on the value of the structured business? Something on credit ratings?  Anything else?

 

Thanks.

 

What i would like to hear and am most focused on is more info that gives you an idea of what value, if any, will be left at ins corp. This continues to be the big call option for MBIA. Despite the large rally in ins. corp's bonds, the credit line from BAC, and ratings adjustment, i would like further verification on where it stands. I'm sure they will also talk about the possible credit ratings for National given various scenarios and when they can begin writing new business again. If i had to guess i would say 6 - 9 months til they begin writing business at National again, but that is just a guess. The conference call has the potential to clear the remaining fog around the company.

[Liberty]

What i would like to hear and am most focused on is more info that gives you an idea of what value, if any, will be left at ins corp. This continues to be the big call option for MBIA. Despite the large rally in ins. corp's bonds, the credit line from BAC, and ratings adjustment, i would like further verification on where it stands. I'm sure they will also talk about the possible credit ratings for National given various scenarios and when they can begin writing new business again. If i had to guess i would say 6 - 9 months til they begin writing business at National again, but that is just a guess. The conference call has the potential to clear the remaining fog around the company.

 

Thank you.

 

That's the thing; the ABV of the Ins Corp in the filings is high, but everybody seems to have been pretty much zeroing it out... So how much are the recent developments changing that equation and potentially allowing some of that value to be realized over time, and is the official ABV number kind of a good indication of how much value could be there, or is the thing so messed up that the actual value (if any) has very little relation (in order of magnitude, I mean) to that official ABV number?

[valuecfa]

 

 

I've dealt with rating agencies in my prior life.  Moodys', for example rate to an expected loss of 2-3% for a BBB rated bond.  Their base case is that a portfolio of BBB rated bonds will suffer 2-3% loss over a generic 5-10 year period.

 

 

 

Moody's doesn't have a BBB rating on their scale, that's S&P.

 

But if you mean Moody's Baa rating... their cumulative 10yr global muni default rate was 0.1349% given a sample period from 1970-2006. And that is cumulative, not per year.

 

Even excluding GO's and water & sewers it is only 0.6671% cumulative 10 yr for a lowly Baa Moody's rated muni bond. And that is even the default rate, not the actual loss rate.

[valuecfa]

Going to sleep to catch the call early tomorrow...Hopefully, we get more clarity and a continued rally along with it in the a.m.

 

Cheers.

[Kraven]

Liberty

In the latest Q1'13 presentation on MBIA website, Adjusted book value is shown as $30.

 

Thank you, I saw that.

 

http://i.imgur.com/0GARwyt.png

 

I know I'm too late for the big pop on this one, but now that it's been significantly de-risked, I'm trying to figure out how much of a value gap there is left between what the market sees and what the IV range might be. Might be a smaller upside, but the dark clouds on the horizon are also a lot smaller it seems...

 

I've been re-reading this whole thread and want to thank everybody for their contributions. Truly amazing the work that has been done on this one. Too bad I'm not a good enough investor to have jumped in earlier, but I try to learn a bit every day :)

 

This isn't directed at you, but it raises an interesting point.  I don't think investments like this come down to being good enough or not.  I think to some extent the "Buffett Effect", for lack fo a better way of phrasing it, has caused people to believe that if they just study a company or an industry long enough that they will know just about everything they need to know and can go forward with their investment or not.  I don't think the world works this way.  As we've discussed before there are too many unknown unknowns and the people who make the best decisions are those that can make those decisions based on imperfect information knowing that it is imperfect.  I believe that there is a little voice in all of us that either allows us to take a leap or not.  Most people in their regular day jobs are not taught to or even permitted to take those leaps.  They arrange information and then take it to one of their bosses for sign off.  Then one day they are required to make a decision and they are caught like a deer in the headlights.  Understanding that one will never know everything there is to know and that even if one did it probably doesn't make any difference and still being able to go forward with a decision (to act or not act) is a skill that will make one a better investor. 

[valuecfa]

Great call so far! Looks like plenty of value is likely to be left at MBIA ins corp (to the tune of an additional >$11/share based on their current reserves)....all previous settlements were within reserves set aside at year end 2012. Company still expects ~$1billion in putbacks from all the remaining companies MBIA is in litigation with, timeline in collecting/settling will be interesting to continue to watch. They expect National to write business again "in the near future.," with more work to be done before relaunching. Low interest rate environment will impact near term demand of insurance. National can now pay dividends to the holding company.

 

Lots more....but i have to take off....and will catch the rest on the replay later in the day.

[ERICOPOLY]

As we've discussed before there are too many unknown unknowns and the people who make the best decisions are those that can make those decisions based on imperfect information knowing that it is imperfect. 

 

So true, information improves your odds but will never bring them up to 100% chance of winning.

 

 

 

[locatevalue]

As we've discussed before there are too many unknown unknowns and the people who make the best decisions are those that can make those decisions based on imperfect information knowing that it is imperfect. 

 

So true, information improves your odds but will never bring them up to 100% chance of winning.

 

I agree these statemenets but its always raises  the question why i went more than 60% of my portfolio on BAC when its below 7, if its not 100% then why that level of concenration, Somehow i felt very confortable doing that then doing atleast 10% in MBI, Their must be something else about odds of that happenning simple logical probability and for BAC it see the chances are very less here i see more chances of going either way I always ask myself this question? My answer to my self in another words is conviction but frankly  its always taking a chance, Probably fooling my self!

[muscleman]

I think MBI would make a good case study in investor psychology. Valuecfa you started this thread nearly two and a half years ago. Good on you seeing it through. There was some gutwrenching volatility. I know I didn't have the confidence to buy when shares fell to $5, and my basis was mid 9s. I was nearly ready to substantially reduce my position last week...luckily procrastination paid off.

 

Meanwhile you have someone like Berkowitz who goes on WealthTrack, and when pressed the #1 security he'd recommend to a retail investor is MBI, he raises a new fund to invest 30% of its capital in it, and he can't stick it through--sells literally days before the big payoff. Anyone know whether that guy from Sabertooth who presented the idea at Ira Sohn held his shares?

 

Valuecfa any thoughts you can provide to the above would be very valuable.

 

I think it all comes down to knowing what you are doing. It's the only way you will have complete confidence in your decisions. If you can't interpret accounting, financial statements and sec filings, and the general business of the company your invested in, then your emotions will take over at some point.

 

If you follow Berkowitz, Watsa,  or whoever into an investment and they sell, do you sell? Do you sell when an analyst or the media reports negatively? If you don't "really" understand what you are doing then you are bound to be emotional about the investment and you have to rely on the advice of others that may or may not know what they are doing. The margin of safety is knowing what you are doing. Can you make mistakes in calculations? Sure, but at least you are doing it the right way.

 

Take a company like Sandridge. 

Despite trying to learn, and reading several books on valuing a company like this, i know very little about the business, geology, economics of a Nat Gas/Oil company to a detail i would feel comfortable with. I can interpret many of the numbers (though many i can't). I know how some of them flow through the financials based on difference circumstances, how the hedging works when you view the instruments on financial statements, some of the economics of the business, common valuation metrics like pv-10, etc but i doubt most if not all can understand all the pieces of a company like this. Myself included. I know just enough about a company like Sandridge to do something stupid. If i decide to invest in it, i would be doing it somewhat blindly based on the talent of the HW team. Not a position i am comfortable with, though i have done this many times in the past, and i am trying to do less of it in the future. You can usually tell pretty quickly when people don't really understand what they are talking about and just focus on key words from a press release, shareholder letter, conference call, or investor presentation.

 

This is totally true.

I am still new and I don't know how to start learning each industry. I work in a software company instead of a financial firm. Do you have any advice on how to start the learning process?

I read books and shareholder letters from various guru investors, but I don't know if that is sufficient. Those letters are generally succinct on each investment idea.

[LC]

I think MBI would make a good case study in investor psychology. Valuecfa you started this thread nearly two and a half years ago. Good on you seeing it through. There was some gutwrenching volatility. I know I didn't have the confidence to buy when shares fell to $5, and my basis was mid 9s. I was nearly ready to substantially reduce my position last week...luckily procrastination paid off.

 

Meanwhile you have someone like Berkowitz who goes on WealthTrack, and when pressed the #1 security he'd recommend to a retail investor is MBI, he raises a new fund to invest 30% of its capital in it, and he can't stick it through--sells literally days before the big payoff. Anyone know whether that guy from Sabertooth who presented the idea at Ira Sohn held his shares?

 

Valuecfa any thoughts you can provide to the above would be very valuable.

 

I think it all comes down to knowing what you are doing. It's the only way you will have complete confidence in your decisions. If you can't interpret accounting, financial statements and sec filings, and the general business of the company your invested in, then your emotions will take over at some point.

 

If you follow Berkowitz, Watsa,  or whoever into an investment and they sell, do you sell? Do you sell when an analyst or the media reports negatively? If you don't "really" understand what you are doing then you are bound to be emotional about the investment and you have to rely on the advice of others that may or may not know what they are doing. The margin of safety is knowing what you are doing. Can you make mistakes in calculations? Sure, but at least you are doing it the right way.

 

Take a company like Sandridge. 

Despite trying to learn, and reading several books on valuing a company like this, i know very little about the business, geology, economics of a Nat Gas/Oil company to a detail i would feel comfortable with. I can interpret many of the numbers (though many i can't). I know how some of them flow through the financials based on difference circumstances, how the hedging works when you view the instruments on financial statements, some of the economics of the business, common valuation metrics like pv-10, etc but i doubt most if not all can understand all the pieces of a company like this. Myself included. I know just enough about a company like Sandridge to do something stupid. If i decide to invest in it, i would be doing it somewhat blindly based on the talent of the HW team. Not a position i am comfortable with, though i have done this many times in the past, and i am trying to do less of it in the future. You can usually tell pretty quickly when people don't really understand what they are talking about and just focus on key words from a press release, shareholder letter, conference call, or investor presentation.

 

This is totally true.

I am still new and I don't know how to start learning each industry. I work in a software company instead of a financial firm. Do you have any advice on how to start the learning process?

I read books and shareholder letters from various guru investors, but I don't know if that is sufficient. Those letters are generally succinct on each investment idea.

Same story here...I find that reading annual reports is useful, so are letters/interviews from leaders in industry XYZ.

[valuecfa]

I sold most of my common holdings today at 15.70 and the rest of my options. Still holding a 5% position. It has been a wild ride. Would like to get back in again to a larger extent below 14. On an iPhone & on the run so can't comment much more at this time.

[Sunrider]

I sold most of my common holdings today at 15.70 and the rest of my options. Still holding a 5% position. It has been a wild ride. Would like to get back in again to a larger extent below 14. On an iPhone & on the run so can't comment much more at this time.

 

Hi ValueCFA

 

I'm interested to hear your rationale - purely a play on a likely dip after the huge run? I seem to recall that you thought a few days ago that at 14.5 it was still hugely undervalued? What's your estimate of value here? The ABV of 30ish?

 

Thanks. C.

[valuecfa]

I sold most of my common holdings today at 15.70 and the rest of my options. Still holding a 5% position. It has been a wild ride. Would like to get back in again to a larger extent below 14. On an iPhone & on the run so can't comment much more at this time.

 

Hi ValueCFA

 

I'm interested to hear your rationale - purely a play on a likely dip after the huge run? I seem to recall that you thought a few days ago that at 14.5 it was still hugely undervalued? What's your estimate of value here? The ABV of 30ish?

 

Thanks. C.

 

It was a combination of several factors. The main reason is that i decided to use some of the proceeds to buy a couple lakefront vacation condos that i plan to rent out, and get a few other things.  I've had my eye on these for awhile and decided to pull the trigger, especially since i would have an immediate tenant in a family member. Also, the BV/ABV convergence wasn't as good as i thought it would be, and while i am happy to hear that they expect more successful lawsuits (and i think they will) that was part of the reason for the only slight decline in ABV this past quarter. Much depends on the successful resolution of pending lawsuits (as usual), but at least we now have a floor in National, the rest is potential upside. I think fair value is somewhere in the ~ $22/share range, but that can change, depending on lawsuits and the writing of new business. I think the company deserves to trade at a premium to book now as well. I will start increasing position size again if it falls below $14/share again, or if some facts such as pending litigation changes. I'm keeping an eye on Rescap in particular. I still think it is a bargain, but less so than before. It was a difficult decision, as i think it is likely to continue to trend higher over the coming days/weeks. I've held this position as a large overweight, and after considering all the factors didn't think it should make up such a large size of my portfolio anymore. It basically was my portfolio for several months. It was a great and profitable ride. I still hold some and would like to eventually increase the position size again at some point, hopefully sooner rather than later. It felt weird selling this holding after all i've been through with it, lol. I wasn't feeling well today, and a co-worker said i was having MBIA withdraws. He may be right.

[mankap]

I read that BTIG has come out with a report after BAC settlement and it puts the fair value at $22.

Does somebody has access to the BTIG report?

[Sunrider]

I sold most of my common holdings today at 15.70 and the rest of my options. Still holding a 5% position. It has been a wild ride. Would like to get back in again to a larger extent below 14. On an iPhone & on the run so can't comment much more at this time.

 

Hi ValueCFA

 

I'm interested to hear your rationale - purely a play on a likely dip after the huge run? I seem to recall that you thought a few days ago that at 14.5 it was still hugely undervalued? What's your estimate of value here? The ABV of 30ish?

 

Thanks. C.

 

It was a combination of several factors. The main reason is that i decided to use some of the proceeds to buy a couple lakefront vacation condos that i plan to rent out, and get a few other things.  I've had my eye on these for awhile and decided to pull the trigger, especially since i would have an immediate tenant in a family member. Also, the BV/ABV convergence wasn't as good as i thought it would be, and while i am happy to hear that they expect more successful lawsuits (and i think they will) that was part of the reason for the only slight decline in ABV this past quarter. Much depends on the successful resolution of pending lawsuits (as usual), but at least we now have a floor in National, the rest is potential upside. I think fair value is somewhere in the ~ $22/share range, but that can change, depending on lawsuits and the writing of new business. I think the company deserves to trade at a premium to book now as well. I will start increasing position size again if it falls below $14/share again, or if some facts such as pending litigation changes. I'm keeping an eye on Rescap in particular. I still think it is a bargain, but less so than before. It was a difficult decision, as i think it is likely to continue to trend higher over the coming days/weeks. I've held this position as a large overweight, and after considering all the factors didn't think it should make up such a large size of my portfolio anymore. It basically was my portfolio for several months. It was a great and profitable ride. I still hold some and would like to eventually increase the position size again at some point, hopefully sooner rather than later. It felt weird selling this holding after all i've been through with it, lol. I wasn't feeling well today, and a co-worker said i was having MBIA withdraws. He may be right.

 

Thank you.

 

I'm a bit twitchy and wondering when the inevitable market correction will hit. Puts are unfortunately fairly pricy on MBI due to the recent volatility so I suppose I'll have to take some profits like you have and hope that my gut feel is correct re an imminent correction.

 

C.

[HJ]

 

 

I've dealt with rating agencies in my prior life.  Moodys', for example rate to an expected loss of 2-3% for a BBB rated bond.  Their base case is that a portfolio of BBB rated bonds will suffer 2-3% loss over a generic 5-10 year period.

 

 

 

Moody's doesn't have a BBB rating on their scale, that's S&P.

 

But if you mean Moody's Baa rating... their cumulative 10yr global muni default rate was 0.1349% given a sample period from 1970-2006. And that is cumulative, not per year.

 

Even excluding GO's and water & sewers it is only 0.6671% cumulative 10 yr for a lowly Baa Moody's rated muni bond. And that is even the default rate, not the actual loss rate.

 

Backward looking vs. forward looking expected losses.  Not saying realized default / loss couldn't stay this low over the next 30 years as well, it could, but caveat emptor.  Baa bonds in corporate land do not have the same experience.  The same type of thinking is what got people to believe the Aaa sub prime MBS story, because right up to the end, past experience was fairly reasonable.  The persistent credit spreads that capital market demands of the muni vs. treasury after the crisis is also not the norm in the past 30 years, which just so happen to be a forward looking indicator.

 

Counterfactuals are hard to prove, but if bond insurance existed for New York City back in the 70's, it would have further complicated what negotiation would have brought.  Would it have lead to New York City actually defaulting because there is another party to share the pain?  All the realized default / loss numbers from Moodys would not have been the same either.  Following the behavior of the various parties in Stockton and Jefferson County today would provide lots of insights.  In the end of the day, NYC was bailed out by the Fed.  And Stockton so far is picking Calpers over creditors, and Jefferson County is having a hell of a time passing legislation tripling sewage rates.  History is yet to be written, but certainly based on information up to now, these guys deserve to trade at a meaningful discount to book.  Most life insurers in US are trading at discount to TBV.  Is the predicament they are facing so much worse than a 100x leveraged muni bond insurer who's only looking to guarantee Baa credits for 20 bps?

 

 

http://www.gurufocus.com/news/70945/berkshire-hathaway-pulls-out-of-municipal-bond-insurance

[stylized_fact]

 

 

I've dealt with rating agencies in my prior life.  Moodys', for example rate to an expected loss of 2-3% for a BBB rated bond.  Their base case is that a portfolio of BBB rated bonds will suffer 2-3% loss over a generic 5-10 year period.

 

 

 

Moody's doesn't have a BBB rating on their scale, that's S&P.

 

But if you mean Moody's Baa rating... their cumulative 10yr global muni default rate was 0.1349% given a sample period from 1970-2006. And that is cumulative, not per year.

 

Even excluding GO's and water & sewers it is only 0.6671% cumulative 10 yr for a lowly Baa Moody's rated muni bond. And that is even the default rate, not the actual loss rate.

 

Backward looking vs. forward looking expected losses.  Not saying realized default / loss couldn't stay this low over the next 30 years as well, it could, but caveat emptor.  Baa bonds in corporate land do not have the same experience.  The same type of thinking is what got people to believe the Aaa sub prime MBS story, because right up to the end, past experience was fairly reasonable.  The persistent credit spreads that capital market demands of the muni vs. treasury after the crisis is also not the norm in the past 30 years, which just so happen to be a forward looking indicator.

 

Counterfactuals are hard to prove, but if bond insurance existed for New York City back in the 70's, it would have further complicated what negotiation would have brought.  Would it have lead to New York City actually defaulting because there is another party to share the pain?  All the realized default / loss numbers from Moodys would not have been the same either.  Following the behavior of the various parties in Stockton and Jefferson County today would provide lots of insights.  In the end of the day, NYC was bailed out by the Fed.  And Stockton so far is picking Calpers over creditors, and Jefferson County is having a hell of a time passing legislation tripling sewage rates.  History is yet to be written, but certainly based on information up to now, these guys deserve to trade at a meaningful discount to book.  Most life insurers in US are trading at discount to TBV.  Is the predicament they are facing so much worse than a 100x leveraged muni bond insurer who's only looking to guarantee Baa credits for 20 bps?

 

 

http://www.gurufocus.com/news/70945/berkshire-hathaway-pulls-out-of-municipal-bond-insurance

 

BRK recently re-entered the muni insurance business.

 

http://online.wsj.com/article/SB10001424127887324445904578284182989812380.html

 

Here's a half decent, semi-recent analysis of the monolines post-crisis:

http://people.brandeis.edu/~dberg/skin_20101111.pdf

[johngu]

The situation now in MBI reminds me a bit of what happened to ORI (Old Republic).  ORI is also an insurance company with two subsidiaries, one that insured structured products and is in regulator compelled run-off, and another that is writing title insurance business.  Back in mid-2012, this business was significantly undervalued, trading at maybe 50-60% of book.  They announced a spin-off of the structured business, then cancelled the spin-off.  However, over the past 9 months or so, their value have steadily climbed to be about book.

 

MBI is very similar in this regard.  Of course, the title insurance business seems to be in a better place vs. the municipal bond insurance business.  However, my feeling is that given the separation between Corp and National is now all but final, people will start to assign the appropriate value to National.  Of course, this is pattern matching based on N=1.  It might take another year or so, but I think there is a good chance that MBI's discount to book will shrink significantly (even assuming 0 for Corp).

[muscleman]

 

 

I've dealt with rating agencies in my prior life.  Moodys', for example rate to an expected loss of 2-3% for a BBB rated bond.  Their base case is that a portfolio of BBB rated bonds will suffer 2-3% loss over a generic 5-10 year period.

 

 

 

Moody's doesn't have a BBB rating on their scale, that's S&P.

 

But if you mean Moody's Baa rating... their cumulative 10yr global muni default rate was 0.1349% given a sample period from 1970-2006. And that is cumulative, not per year.

 

Even excluding GO's and water & sewers it is only 0.6671% cumulative 10 yr for a lowly Baa Moody's rated muni bond. And that is even the default rate, not the actual loss rate.

 

Backward looking vs. forward looking expected losses.  Not saying realized default / loss couldn't stay this low over the next 30 years as well, it could, but caveat emptor.  Baa bonds in corporate land do not have the same experience.  The same type of thinking is what got people to believe the Aaa sub prime MBS story, because right up to the end, past experience was fairly reasonable.  The persistent credit spreads that capital market demands of the muni vs. treasury after the crisis is also not the norm in the past 30 years, which just so happen to be a forward looking indicator.

 

Counterfactuals are hard to prove, but if bond insurance existed for New York City back in the 70's, it would have further complicated what negotiation would have brought.  Would it have lead to New York City actually defaulting because there is another party to share the pain?  All the realized default / loss numbers from Moodys would not have been the same either.  Following the behavior of the various parties in Stockton and Jefferson County today would provide lots of insights.  In the end of the day, NYC was bailed out by the Fed.  And Stockton so far is picking Calpers over creditors, and Jefferson County is having a hell of a time passing legislation tripling sewage rates.  History is yet to be written, but certainly based on information up to now, these guys deserve to trade at a meaningful discount to book.  Most life insurers in US are trading at discount to TBV.  Is the predicament they are facing so much worse than a 100x leveraged muni bond insurer who's only looking to guarantee Baa credits for 20 bps?

 

 

http://www.gurufocus.com/news/70945/berkshire-hathaway-pulls-out-of-municipal-bond-insurance

 

When a bond gets insured, the local government has to agree to a bunch of covenants by the muni insurer.

Yes, I agree that the default outcome could be different if there had been an insurer to share the pain, which is a negative, will likely be canceled out by the ability of the insurer to select good quality bonds to insure, which is a positive.

[stylized_fact]

 

 

I've dealt with rating agencies in my prior life.  Moodys', for example rate to an expected loss of 2-3% for a BBB rated bond.  Their base case is that a portfolio of BBB rated bonds will suffer 2-3% loss over a generic 5-10 year period.

 

 

 

Moody's doesn't have a BBB rating on their scale, that's S&P.

 

But if you mean Moody's Baa rating... their cumulative 10yr global muni default rate was 0.1349% given a sample period from 1970-2006. And that is cumulative, not per year.

 

Even excluding GO's and water & sewers it is only 0.6671% cumulative 10 yr for a lowly Baa Moody's rated muni bond. And that is even the default rate, not the actual loss rate.

 

Backward looking vs. forward looking expected losses.  Not saying realized default / loss couldn't stay this low over the next 30 years as well, it could, but caveat emptor.  Baa bonds in corporate land do not have the same experience.  The same type of thinking is what got people to believe the Aaa sub prime MBS story, because right up to the end, past experience was fairly reasonable.  The persistent credit spreads that capital market demands of the muni vs. treasury after the crisis is also not the norm in the past 30 years, which just so happen to be a forward looking indicator.

 

Counterfactuals are hard to prove, but if bond insurance existed for New York City back in the 70's, it would have further complicated what negotiation would have brought.  Would it have lead to New York City actually defaulting because there is another party to share the pain?  All the realized default / loss numbers from Moodys would not have been the same either.  Following the behavior of the various parties in Stockton and Jefferson County today would provide lots of insights.  In the end of the day, NYC was bailed out by the Fed.  And Stockton so far is picking Calpers over creditors, and Jefferson County is having a hell of a time passing legislation tripling sewage rates.  History is yet to be written, but certainly based on information up to now, these guys deserve to trade at a meaningful discount to book.  Most life insurers in US are trading at discount to TBV.  Is the predicament they are facing so much worse than a 100x leveraged muni bond insurer who's only looking to guarantee Baa credits for 20 bps?

 

 

http://www.gurufocus.com/news/70945/berkshire-hathaway-pulls-out-of-municipal-bond-insurance

 

When a bond gets insured, the local government has to agree to a bunch of covenants by the muni insurer.

Yes, I agree that the default outcome could be different if there had been an insurer to share the pain, which is a negative, will likely be canceled out by the ability of the insurer to select good quality bonds to insure, which is a positive.

 

Covenants vary depending on the bond type, with essential projects usually bound by stronger covenants.  I think it has already been pointed out, but some of the recent defaults in Scranton, Stockton, and Jefferson Co were insured. 

 

http://www.breckinridge.com/insights/whitepapers.html?id=1284

[HJ]

 

Covenants vary depending on the bond type, with essential projects usually bound by stronger covenants.  I think it has already been pointed out, but some of the recent defaults in Scranton, Stockton, and Jefferson Co were insured. 

 

http://www.breckinridge.com/insights/whitepapers.html?id=1284

 

Nice article.  Mike Milken has always said that corporate debt is better than consumer debt, which in turn is better than soverigns.  While munis are not soverigns, same type of issue exists.  As far as debt covenants are concerned, when soverigns are involved, the GM bankruptcy resolution also gives another warning shot to their integrity. 

 

Another aspect that is not discussed is the fact that the natural holders of the debt of a particular municipality tends to be a local financial institution.  A local bank or insurance company maybe, and some locally based cash rich individuals or companies.  Defaulting on them would have a disproportionately large impact on the local economy.  Visualize that negotiation, you can see the local bank president telling the politician to go watch "It's a Wonderful Life" 100 times.  But these days, the debt holder is JP Morgan who has recourse to a New York City bond insurer.  Why should we, Jefferson County residents, pay triple the sewage rate, or disturb the local pension system just so that the evil Wall Streeters will be made whole? 

 

I simply believe that as long as these cases are still all up in the air, the bond insurers ought to trade at a meaningful discount.  To trade at or close to book requires one to reach the conclusion that cases like Stockton, Jefferson County, etc. will all ultimately be resolved with bond insurers taking minimal losses.  That might be the case, but at 100x leverage, you don't have much room for error. 

 

The Baa muni spread over treasury may give you a better indication of what they should be charging for guaranteeing that risk.  Even in today's yield starved envorironment, that's magnitudes away from 20 bps.