MBI - MBIA Inc.

[muscleman]

I've done a ton of research on MBIA and the other insurers over the past couple weeks.

 

I even started buying MBIA shares before I turned around the next day and sold them all after thinking a bit more.

 

1) The company is extremely leveraged by nature. As a result, mistakes / expenses related to those mistakes need to be very small.

 

2) I recall reading back to Lowenstein's 'While America Aged' and how vicious the pension fights got. There was no real solution except eventual bankruptcy or long periods of weakness until near death.

 

The risk of an era of heightened legal expenses due to protracted battles with municipalities and pension plans left me very uneasy. Legal costs on just three protracted battles (Detroit, Puerto Rico, Illinois) can easily eat away at book value for years. Not to mention if there are any potential discounts to par.

 

3) In the past, MBIA could easily have said look, either give us par or we aren't writing any new insurance on your bonds. Given that was in an era where 50% of muni issues were insured (vs the 3% of new issues today), that key point of leverage is gone.

 

4) Much of this thread successfully discussed and handicapped the MBIA Corp. litigation odds. Very little was said about the economics of the municipal bond insurance business (which is the only thing that matters now). Let me leave you with this:

 

http://www.berkshirehathaway.com/letters/2008ltr.pdf (pages 12/13)

 

On the surface, MBIA looks cheap given the historical record of municipal bonds going back many decades. I'm making the humble proclamation that what we see through the windshield may look much more different than what we see in the rear view mirror.

 

If you look at the operating supplement of MBI, their BIG holdings is only 0.8% of total portfolio.

If we assume that they take a 20% haircut on all BIG holdings, the stock is still cheap.

 

Let's look at the recent fights.

Detroit: 80Million GO bond. The others are Sewer bonds which even Orr said they are profitable departments and they should be paid on time.

Puerto Rico: Their constitution said bond holders must be paid in full first before other liabilities. So pensioners may take a cut, but less likely to be the bond holder. Also their annual deficit has declined from 3 bn to 0.7 bn from 09 to 14.

Harrisburg: Settled and AGO has the opportunity to recover 100%.

Stockton: Settled and AGO has the opportunity to recover 100%.

[txlaw]

On the surface, MBIA looks cheap given the historical record of municipal bonds going back many decades. I'm making the humble proclamation that what we see through the windshield may look much more different than what we see in the rear view mirror.

 

I think what you're saying about what we see through the windshield versus the rear view mirror is correct.  However, one thing I would point out is that National is in a supercyclical business. 

 

We are likely in the trough of the supercycle, where municipal defaults will be much more elevated than in the past.  However, to the extent that you believe that National can survive these elevated defaults and start writing profitable business, it is in a good position to be for the very long run if the muni bond insurance gets back to levels much higher than 3% of issuance.  IMO, that's why BHAC exists and why Wilbur Ross helped recapitalize AGO.  It's just that it will take some time to climb out of the trough of the cycle.

 

It's almost an elongated version of what has happened in the PMI business.  A lot of people will say stay away from the PMI business because we all saw what happened to them during the financial crisis.  On the other hand, you have companies like AIG who are thinking long term and have realized that now is a great time to be writing policies, since we are at the bottom of both a regular cycle and a supercycle.  That's why I once suggested that FFH consider buying a company like ORI at a fair price and recapitalize the mortgage insurance subsidiaries.

 

In this vein of thinking about the long term prospects of a business, I think MBIA Corp could actually be a very interesting way to play the transformation of Fannie and Freddie and the mortgage market.  Let's assume that MBIA Corp equity is worth very little.  One thing that would be interesting to do would be to partner with somebody (maybe a PE firm) who wants to invest in an entity that will compete with Fannie and Freddie once the FMIC is created and Fannie/Freddie are either broken up or converted to private capital MBS insurers.  It would become Mortgage Bond Insurance Corp rather than Municipal Bond Insurance Corp, and it would be a tax advantaged entity compared to other private capital MBS insurers because of the copious amount of NOLs on the balance sheet.   

 

All this is to say that if going under is off the table for MBI, and the muni bond market does not stagnate and remain at 3% of issuances, then I still see quite a bit of value here that is underappreciated by the market.  The question is, is there any catalyst for the market to realize IV?

[Luke 532]

The question is, is there any catalyst for the market to realize IV?

 

Cash from BAC and ResCap settlements, ratings agency upgrades, the "go-ahead" to begin the process of writing new business, etc. could be a few catalysts in the next few months.

[TwoCitiesCapital]

On the surface, MBIA looks cheap given the historical record of municipal bonds going back many decades. I'm making the humble proclamation that what we see through the windshield may look much more different than what we see in the rear view mirror.

 

I think what you're saying about what we see through the windshield versus the rear view mirror is correct.  However, one thing I would point out is that National is in a supercyclical business. 

 

We are likely in the trough of the supercycle, where municipal defaults will be much more elevated than in the past.  However, to the extent that you believe that National can survive these elevated defaults and start writing profitable business, it is in a good position to be for the very long run if the muni bond insurance gets back to levels much higher than 3% of issuance.  IMO, that's why BHAC exists and why Wilbur Ross helped recapitalize AGO.  It's just that it will take some time to climb out of the trough of the cycle.

 

It's almost an elongated version of what has happened in the PMI business.  A lot of people will say stay away from the PMI business because we all saw what happened to them during the financial crisis.  On the other hand, you have companies like AIG who are thinking long term and have realized that now is a great time to be writing policies, since we are at the bottom of both a regular cycle and a supercycle.  That's why I once suggested that FFH consider buying a company like ORI at a fair price and recapitalize the mortgage insurance subsidiaries.

 

In this vein of thinking about the long term prospects of a business, I think MBIA Corp could actually be a very interesting way to play the transformation of Fannie and Freddie and the mortgage market.  Let's assume that MBIA Corp equity is worth very little.  One thing that would be interesting to do would be to partner with somebody (maybe a PE firm) who wants to invest in an entity that will compete with Fannie and Freddie once the FMIC is created and Fannie/Freddie are either broken up or converted to private capital MBS insurers.  It would become Mortgage Bond Insurance Corp rather than Municipal Bond Insurance Corp, and it would be a tax advantaged entity compared to other private capital MBS insurers because of the copious amount of NOLs on the balance sheet.   

 

All this is to say that if going under is off the table for MBI, and the muni bond market does not stagnate and remain at 3% of issuances, then I still see quite a bit of value here that is underappreciated by the market.  The question is, is there any catalyst for the market to realize IV?

 

Maybe not near term, but sometimes things move a lot quicker than expected. I bought SB (dry bulker) back in 2010 at 7.50 a share. The price generally trended downwards for 3 years until it hit 3.18 a share. I was picking up shares the whole way down and doubled down at 3. Then some good news about potential rates rising hit and the stock went from 3 to 5.50 in days. Then it stagnated for a month or two and jumped from 5 to 7 in days on more positive news. It's a company with 2x as many ships as it was when I first bought, higher revenues, and a less leveraged balance sheet. These were 40-60% jumps in a similar span of time to SHLD's and there were 2 of them. I wouldn't be surprised to see a similar move to 9-10 when rates stabilize at higher levels for an extended period of time.

 

Now obviously SB is smaller and less liquid than MBIA, but if you really think muni insurance isn't going anywhere (I don't), then 3% is a small bar for massive growth for the oligopoly that runs the business just like dry bulk rates were low. It could take 3 years but you just build your position the whole time accruing IV internally until it explodes externally. Even a jump to 5% of issuance coverage would nearly double revenues/profits for the industry. It would also add geographic diversity while growing profitability (due to higher rates in general from increased defaults) so you maybe you're getting more than 2X the return while diversifying some of the risk.

 

 

 

 

This stock has been "worth it" for me from economic as well as educational perspectives. This was one of my first "value" stocks after I became a believer in the philosophy. Still holding on because I recently read somewhere that waiting for 2-3 years for value gap to close is a prudent idea. Economic profits are very small right now (no sure how much longer I get to call them profits), but here are few things I learnt:

 

1. Learnt a lot about how the legal / settlement system works (big thanks here to Christian Herzeca)

 

2. Learnt it pays well to coat tail great investors if you do your due diligence as well (read and followed Bruce Berkowitz into this, so thanks to him)

 

3. Learnt that if you buy a stock based on a short term catalyst, sell it immediately after your thesis plays out even if the price doesn't match your estimate of value. (Don't get too greedy, should have followed BB here too )

 

4. Learnt that when you can make a reasonable guess on the time frame for the catalyst, it is better to take a position using options rather than cash (Thanks to Ericopoly for this, in hindsight it was obvious that buying calls was the thing to do)

 

5. Learnt that in a bad business+volatile stock with decent upside but no visible catalyst in near term, you can make some extra money selling OTM calls in the short term against your long cash position

 

6. Learnt a little bit about the Municipal borrowers and their accounting and thinking (Politicians are bad businessman and muni-bond  tax breaks you get, don't really compensate you for the crazy risks you take)

 

7. It is so much more easier betting on good and growing businesses even if they are not ultra cheap. (I am trying to convince myself to stay out of such "turnaround" stocks in future, but I keep getting sucked into these for some reason  :)  )

 

 

PS: "Experience is what you get when you don't get what you want "  ;)

 

You andi both. Kudos.

 

In general, it seems strange to me that people were buying this around this price when there was risk of a settlemet never being made, but aren't buying it now with the settlement in the rear view mirror. I can understand not taking speculative options positions, just think its odd that no one is talking bout this now....

[hyten1]

surprise not much going here considering what is going on with the stock, Stockton, Detroit, Puerto Rico. maybe i'll sell some puts

 

 

[Eye4Valu]

Is the majority of recent market weakness in MBI attributed solely to Puerto Rico? Considering that the monolines appear to be trading as "second derivatives of investors’ sentiment with regard to the U.S. territory’s ability to refinance its debt and to work its way out of its fiscal issues", as Palmer/BTIG points out in a recent note, I thought the following was worth review: http://www.nationalpfg.com/pdf/Sector_Studies/PuertoRicoRegionStudy.pdf

 

Forgive me if this link has been previously posted to this chain. Mitigating factors to consider with regard to PR include the staggered maturities of the debt. Not overly burdensome in the near term. Harry Fong/MKM points out that it is way too early to be able to determine the extent of monoline liability in PR. Despite the contagion of fear that has swept the monolines of late, there does appear to be time for PR to continue to work on its substantial issues. There does appear to be some success in this regard. The market seems to be pricing in near term losses that I just don't see on the immediate horizon.

 

Additional time allows MBI to recoup Rescap settlement. MBI weakness may allow them to commute remaining exposures at Ins. Corp. on a more economical basis, and/or trade the Surplus Notes. Palmer has done an excellent job pointing this out. Additional time will see market interest rates move up. Those bullish on MBI must treat it as a true investment, and be committed for next 3-5 years. Traders will be influenced by recent market panic, but I just don't see near term losses piling up on either PR or Motor City.

 

Be greedy when others are fearful. Just don't bet the house on monolines.   

 

 

[Eye4Valu]

http://www.housingwire.com/blogs/1-rewired/post/26373-mbia-says-its-sitting-prettier-analysts-agree

 

http://www.bloomberg.com/news/2013-09-26/bond-insurers-seen-avoiding-puerto-rico-losses-chart.html

 

Haven't seen these articles posted here. Not puffing up MBI. Just food for thought.

 

Counterpoints not only welcomed but encouraged.

[prunes]

I hadn't seen this before. Regarding Stockton and the relative safety of revenue bonds, from BTIG:

 

Stockton last week released a draft plan for adjusting its debt that disclosed a deal with buy-rated MBIA (MBI) over about $45mm in outstanding lease revenue bonds for the city’s arena whose payments would be cut by 3%. About $32mm in parking-garage bonds insured by MBI would receive a 12% haircut, while a third bond related to a city office building will be paid in full.

[muscleman]

I hadn't seen this before. Regarding Stockton and the relative safety of revenue bonds, from BTIG:

 

Stockton last week released a draft plan for adjusting its debt that disclosed a deal with buy-rated MBIA (MBI) over about $45mm in outstanding lease revenue bonds for the city’s arena whose payments would be cut by 3%. About $32mm in parking-garage bonds insured by MBI would receive a 12% haircut, while a third bond related to a city office building will be paid in full.

 

Is there any more details about the Stockton restructuring? If the haircut is so small for bond insurers and no haircut for pensioners, how can it fix any debt problem? ???

[Eye4Valu]

http://www.bloomberg.com/news/2013-10-14/bond-insurer-cushions-adequate-for-puerto-rico-losses-s-p-says.html?cmpid=yhoo

 

http://www.btigresearch.com/2013/10/14/assured-guaranty-mbia-sp-says-capital-cushions-sufficient-to-absorb-any-losses-from-puerto-rico-detroit/

[Luke 532]

Puerto Rico Denies Bankruptcy And Takeover Rumors

 

http://latino.foxnews.com/latino/news/2013/10/16/puerto-rico-denies-bankruptcy-and-takeover-rumors/

 

San Juan, Puerto Rico –  The government of Puerto Rico denied Tuesday that it is near bankruptcy or might need U.S. federal intervention, offering those assurances during a conference call with investors aimed at alleviating concerns about a recent cut in planned bond sales and the island's continuing financial crisis.

 

Gov. Alejandro García Padilla said that the U.S. territory would not default on its debts as it heads into its eighth year of recession.

 

"We will do everything, and I repeat, everything that is necessary for Puerto Rico to honor all its commitments," he said. "It's not only a constitutional but also a moral obligation."

 

Investors became rattled when the island's Government Development Bank recently announced it would cut bond sales to between $500 million and $1.2 billion for the rest of the year, after investors pushed the yield on Puerto Rico bonds above 10 percent.

 

The Caribbean territory's government is a major issuer of bonds in the U.S., where the bonds are popular because they are exempt from federal and state taxes.

 

García said he would introduce legislation before year's end to overhaul the pension system for teachers, which is at risk of running out of funds. Earlier this year, he reformed a separate and larger public pension system that was crumbling under a $37.3 billion unfunded liability.

 

Last week, García also increased the borrowing capacity of Puerto Rico's main debt issuer, the Sales Tax Financing Authority, in a move praised by several municipal bond analysts.

 

The move comes as the territory struggles with $70 billion in public debt and a 13.9 percent unemployment rate, higher than any U.S. state.

 

Treasury Secretary Melba Acosta said rumors about the U.S. government intervening to help alleviate Puerto Rico's financial crisis are not true. But she said U.S. officials are discussing setting up a committee that would help find ways to boost the island's economy.

 

"It's something that's under discussion right now," she said.

 

Investors, however, kept questioning the possibility of the federal government becoming involved, and whether territorial agencies could file for Chapter 7 or 11 bankruptcy restructuring.

 

One noted the market is speculating that the island's power company could file for bankruptcy because it operates as a mostly autonomous entity.

 

"There seems to be a lot of misinformation out there," said Jose Coleman, executive vice president of the Government Development Bank. "Bankruptcy is completely out of the question concerning Puerto Rico."

 

Acosta promised investors that the government would cut its $820 million budget deficit in half by 2015. Officials noted that the deficit has already been reduced from $2.4 billion.

 

Officials also pledged to start holding regular investor webcasts at least once a quarter and said agencies including the Highway Transportation Authority would start posting their quarterly and monthly results.

 

David Chafey Jr., board president of the Government Development Bank, said he doesn't expect the island's four main public corporations to need subsidies or loans for the upcoming fiscal year, in part because of such measures as an average 60 percent rate increase by the state water company.

[rpadebet]

MBIA and Morgan Stanley Settle Bond Fight - Wall Street Journal

Bond insurer MBIA will pay Morgan Stanley $1.1 billion to settle a two-year-old legal clash over guarantees tied to commercial and residential real estate.

 

http://online.wsj.com/news/articles/SB10001424052970203518404577096173087163522

 

Isn't this from Dec 2011? I think most of the exposure they have now is with Credit Suisse.

[Luke 532]

MBIA and Morgan Stanley Settle Bond Fight - Wall Street Journal

Bond insurer MBIA will pay Morgan Stanley $1.1 billion to settle a two-year-old legal clash over guarantees tied to commercial and residential real estate.

 

http://online.wsj.com/news/articles/SB10001424052970203518404577096173087163522

 

Isn't this from Dec 2011? I think most of the exposure they have now is with Credit Suisse.

 

Yes, my mistake.  I deleted it.  I think my lack of sleep with the newborn is catching up to me.

[rpadebet]

MBIA and Morgan Stanley Settle Bond Fight - Wall Street Journal

Bond insurer MBIA will pay Morgan Stanley $1.1 billion to settle a two-year-old legal clash over guarantees tied to commercial and residential real estate.

 

http://online.wsj.com/news/articles/SB10001424052970203518404577096173087163522

 

Isn't this from Dec 2011? I think most of the exposure they have now is with Credit Suisse.

 

Yes, my mistake.  I deleted it.  I think my lack of sleep with the newborn is catching up to me.

 

Ha ha...I got excited initially. Remembered the good old days anticipating settlements and legal rulings. That was so much fun. Now it is more like a call option on Puerto Rico bonds.

[txlaw]

I just watched the video of WEB at the Fortune Powerful Women Summit.  He said that if interest rates were higher, and he got the right pricing, BHAC would write municipal bond insurance.

 

Given that interest rates look like they'll be low for a while, he may not write insurance for a couple of years.  But in the long run, BRK will likely be growing that biz. 

[HJ]

As the plan of adjustments has come out of Stockton, Harrisburg and Jefferson County, I have to say that the existential threat to the muni insurers are turning out better than the worst fears.  However, the focus now turns towards ability to earn a reasonable return and grow business, assuming we can get over Detroit, Puerto Rico, and whichever the next stressed municipality comes along.  Pricing continues to be somewhat inadequate (relative to credit spreads) for the most part, and the borrowers really can't afford to pay much more.  It's hard not to argue for a meaningful discount for as long as municipal finance countrywide is in question.  The only question becomes how much should the discount be, and how long do you expect the current environment to last.  Maybe Puerto Rico rings the bell at the bottom, but then you hear all about the unfunded pension liabilities of Illinois, and start looking up the exposure to the pension obligation bonds over there.  Rinse, repeat.  At some point this ought to come out of the woods to the extent the plan of adjustments continues to respect the debt market, just doesn't seem to be quite there yet.

 

 

[indythinker85]

I think he sold MBIA at least in the MF http://www.valuewalk.com/2013/10/fairholme-jcp-fannie-freddie/  http://www.sec.gov/Archives/edgar/data/1096344/000119312513413006/d553329dnq.htm

[Luke 532]

National pays $214M dividend to MBIA a few weeks ago: http://investor.mbia.com/Cache/20422700.pdf?IID=103405&FID=20422700&O=3&OSID=9

[zippy1]

Q3 results out.

http://finance.yahoo.com/news/mbia-inc-reports-third-quarter-210100120.html

MBIA Inc. (MBI) (the Company) today reported Adjusted Book Value (ABV) per share (a non-GAAP measure defined in the attached Explanation of Non-GAAP Financial Measures) of $28.68 per share at September 30, 2013 compared with $30.68 per share at December 31, 2012. Book Value (BV) per share was $16.54 as of September 30, 2013, compared to $16.22 as of December 31, 2012.

“Our third quarter financial results were disappointing,” said MBIA Inc. President and Chief Financial Officer Chuck Chaplin. “We recorded increased losses on our insured CMBS exposures and took a partial write-down against our insured second lien RMBS loss recoverable. We also had some large expenses, including a $29 million impairment to the value of our headquarters property, a $44 million loss related to a salvage asset that we settled by receiving a marketable security and $14 million in expenses related to a reduction in our workforce. On the revenue side, we saw a slowdown in our always unpredictable refunding premiums earned as interest rates spiked.”

 

“However, after years of high loss activity and litigation we’re getting much closer to resuming more normal operations,” Mr. Chaplin continued. “We’ve begun to reposition National’s investment portfolio from its nearly 40 percent cash position at June 30, and we continue to make good progress in our discussions with the rating agencies regarding National’s rating. Early in the fourth quarter, National paid its first dividend to MBIA Inc. of $214 million. Over the next few months, we anticipate the beginning of a new period of growth and stability for our shareholders.”

[mrvlad0]

Judge rules against ResCap noteholders, knocks legal tactics

 

http://reut.rs/1aIIIsG

[zippy1]

From Q3 conference call:

About National start writing insurance:

On last quarter's call, I was asked about the likely timeframe for getting National back to writing domestic public finance insurance. My response then was 3 to 6 months, and I'm prepared to stand by that estimate. The key is achieving sufficiently high ratings to support National's business plan. We are engaged in active discussions with the rating agencies at this point, and I remain optimistic about the outcome of their reviews. National's existing capitalization, earnings and cash flow from operations, risk management and underwriting discipline should rank at among the very highest rated bond insurers. We have maintained our core underwriting, surveillance, workout, legal and financing -- financial staffing levels at full strength. And as we get going, we would expect to add to our existing marketing team. We have meetings scheduled with rating agencies that continue over the next few weeks. And while the timing is essentially in their control, we currently anticipate concluding those processes by year end. This is our highest near-term priority.

 

Probably not going issue new shares,

As I mentioned on last quarter's call, we think that it would be prudent in the longer term to have less financial leverage at our holding company. Our game plan is to use free cash generation from the operating businesses to pay down holding company debt over time. With the receipt of the first dividend from National in October, we have started that process. I also noted on our last call that we may access the capital markets at some point in the future. Since we received a number of questions afterwards, let me be clear on that issue. We have no term -- no near-term needs or plans to access the capital markets. It's merely an option that we could consider in the future under the right set of circumstances.

[valueorama]

http://online.wsj.com/news/articles/SB10001424052702304477704579252162779446726

 

ResCap Liquidation plan is confirmed by the BK Judge. So, MBI should get a couple of dollars by end of year or early next year. But the stock is down. So much for market efficiency/perfect information.

[yitech]

AGO, MBI, AMBC down all week after this WSJ piece:

Puerto Rico Dips Into Cash to Repay Loan

http://online.wsj.com/news/articles/SB10001424052702303560204579250503880005812

 

Puerto Rico last week repaid a $400 million short-term loan from Barclays PLC by drawing on its pile of cash rather than by selling bonds, in the latest sign of the island's travails funding itself, said people familiar with the matter.

 

The financially strapped territory had planned to use proceeds from a new bond sale to pay off the loan this month, but the island hasn't tapped the market. The island's bonds have plunged in value this year as investors feared its large debt load and economic malaise could cause it to default.

 

They are trading like derivatives on Puerto Rico all over again...

[yitech]

Puerto Rico May Be Cut to Junk by Moody’s on Weak Economy

http://www.bloomberg.com/news/2013-12-12/puerto-rico-may-be-cut-to-junk-by-moody-s-as-economy-weakens.html

[muscleman]

Puerto Rico May Be Cut to Junk by Moody’s on Weak Economy

http://www.bloomberg.com/news/2013-12-12/puerto-rico-may-be-cut-to-junk-by-moody-s-as-economy-weakens.html

 

I checked fidelity.com, but I didn't see any such bonds trading at 67 cents a dollar. Which one is that?

I think if Moody does downgrade the bonds, there will be a massive sell and panic. Then there could be some bailout by the US government.

puerto rico does not seem to have a insolvency issue. Just the liquidity issue, so it is fixable. :)