To be clear, MBI, still rated AA by Standard & Poor’s, and Aa2 by Moody’s, is issuing a hybrid (fixed for five years, then floats) at a yield of 14%, which is consistent with a company at risk of bankruptcy.
Note that this deal got off only after investors forced a repricing (hat tip Steve A). As Reuters had reported yesterday, MBIA had initially offered these surplus notes on Thursday, with an expected coupon of 9% to 12%, which was already double the coupon of comparably rated bonds.
From Bloomberg:
MBIA Inc., the largest bond insurer, is offering to pay a yield of about 14 percent on its $1 billion of AA rated notes, a rate usually charged to the lowest-ranked borrowers….
“Obviously, there are problems in wonderland,” said Alan Kral, managing director of Trevor Stewart Burton and Jacobsen, a New York-based investment adviser with $750 million under management, including shares of MBIA.
MBIA needs the money to bolster capital and stave off a reduction in its insurance unit’s top credit rating. Fitch Ratings gave MBIA until the end of the month to raise at least $1 billion. A loss of the rating would cripple MBIA’s business of insuring debt.
MBIA said this week it would sell the notes and cut its dividend 62 percent to help increase its capital. In December, the company said private equity firm Warburg Pincus LLC would invest $1 billion in the Armonk, New York-based company…..
The $1 billion of 25-year hybrid bonds will pay a fixed rate until 2013, when, if not called, they will begin to float. Surplus notes are bonds issued by insurance companies that state insurance regulators consider equity.
Moody’s Investors Service gave the debt an Aa2 rating, two levels below MBIA’s insurance company, and Standard & Poor’s ranked it an equivalent AA.
Under the terms of the notes, MBIA can only make interest or principal payments with the blessing of the New York State Insurance Department, according to a preliminary prospectus.
MBIA’s yield is equivalent to 956 basis points higher than U.S. Treasuries of a similar maturity. The extra yield, or spread, on investment-grade bonds is 217 basis points, according to Merrill Lynch index data. The premium to own high-yield, or junk-rated, debt is 663 basis points. A basis point is 0.01 percentage point.
“That would be close to distressed levels,” said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. Distressed bonds trade at 1,000 basis points over Treasuries of similar maturity.
MBIA, down 80 percent in the past 12 months before today, jumped $2.61, or 18 percent, to $16.72 at 1:37 p.m. in New York Stock Exchange composite trading. Marty Whitman’s Third Avenue Management LLC more than doubled its stake in the company to 10.98 percent, according to a regulatory filing yesterday.
Earlier this week, MBIA said it expects to take fourth- quarter markdowns totaling $3.3 billion on its guarantees of securities based on home loans made to borrowers with poor credit.
“It’s clearly a troubled company,” said William Featherston, managing director in high yield at J. Giordano Securities LLC in Stamford, Connecticut.
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So they’re issuing debt at yields not seen since right before the Argies changed governments or Italy wasn’t part of the EU–and their expectation is that they will, through this, be able to maintain their AAA rating.
Got it.
The thing is, they may well be correct, even if all those “unsophisticated investors” (you know, the hedge funds, pension funds, SWFs, and SIVs that bought the AAA “radioactive waste” MBSes) only worry about credit ratings, not credit quality.
I wouldn’t want to be an MBIA shareholder, though.
So the “Ratings agencies” are calling this debt Aa2 or AA, while the markets are calling it below junk. Got it.
Anyone who still follows the “analysis” of these esteemed ratings agencies deserves to be separated from their money.
Almost forgot Nouriel Roubini’s great quote from last month:
“a business model that cannot survive without an AAA rating is a business model that cannot fundamentally deserve an AAA rating”
To which I guess the corollary is that any company that needs an emergency infusion of cash at near-default rates shouldn’t be AAA either. Regardless of whether they’re successful in raising that money.
There was a story out earlier today that Third Avenue, currently an owner of a substantial and deeply under water equity stake, bought a meaningful portion of the deal. Imagine the yield if this less than dis interested buyer was not in the mix
Brian,
That it quite a bit of information. I looked at hoi polli news (search on Google News) and didn’t see it there.
Gee, Marty Whitman was once considered to be savvy, but this looks like a classic panicked trader’s reaction, throwing good money after bad in the hope that you can persuade the market. That rarely succeeds, and only when you can exit on the momentum you’ve created. Certainly not the position Third Avenue is in.
The Third Ave news was on CNBC, Yves, so who knows.
I almost spit up coffee when I heard it, and my reaction was the same as yours.
As for Whitman (who I’ve followed for a long time and have great respect for), I’ve been absolutely perplexed by his monoline stake. His whole premise of investing is to evaluate common equity as if it were debt, i.e. a capital cushion able to withstand the fattest of the tails, and the monolines…well…that they are not!
Quite a pissing contest between Whitman and Ackman. My money is with Ackman, though I thoroughly rethought that position when Whitman announced his stake and tried to figure out what he sees that Ackman does not. All I could figure is that he has vastly underestimated the reckless lending that has just recently consummated, and therefore underestimates MBI’s potential exposure. Also, it’s always part of the bottoming process to have skilled value guys get in too early, and get blown up a little.
RJ
Ackman did a video interview on Bloomberg this week, giving his rationale for his large short position. First, NYS Insurance Superintendent Eric Dinallo has said his FIRST duty is to protect the policyholders of the insurers. He has the authority
to withhold interest payments from bondholders if
such would threaten the Insurer’s ability to meet default obligations. Second, MBI has a 9.1 B exposere to a CDO squared, larger than recently stated. These can have Very low recovery rates. This is part of a total 30B exposure to CDOs. He thinks MBI needs to raise 4B right away, and ultimately 10B, to survive. So he says the 14% bond may be a zero coupon. Don’t ask me. I don’t understand this stuff.
“Gee, Marty Whitman was once considered to be savvy, but this looks like a classic panicked trader’s reaction, throwing good money after bad in the hope that you can persuade the market. That rarely succeeds, and only when you can exit on the momentum you’ve created. Certainly not the position Third Avenue is in.”
I still consider Marty Whitman to be saavy. Remember one of Whitman’s investment tenets “focus on what is not what the market thinks.” A panicked trader he is not. The turnover on TAVFX is generally below 10% – very long time horizon. It may be higher in 2008 due to fund outflows. Per most recent shareholder letter, Whitman increased his stake in the surplus notes at very attractive yields.
A few other thoughts.
Dinallo approved first interest payment on surplus notes in July. Stock is rallying. MBIA insurance sub generated positive cash flow for the first six months of 2008.
Despite its effective run-off status, the company appears to be attractively priced. I’ll bet on Whitman.
I hope these posts are saved for a year or two. I believe those posters who mindlessly parroted Bill Ackman will be proven wrong. We shall see.
Third Avenue Shareholder
MBIA Shareholder