MBIA To Receive $1 Billion Equity Infusion From Warburg Pincus

Bloomberg reports that monoline bond insurer MBIA, which was at risk of a ratings downgrades due to having guaranteed mortgage-related debt, has gotten a stay of execution in the form of an equity investment by private equity firm Warburg Pincus.

While no rating agency has yet confirmed that this capital infusion will be sufficient to forestall a downgrade, the rating agencies were doing everything possible to avoid downgrading the large monolines (and MBIA is the biggest) because the knock-on effects would be considerable. Whether this purchase will be sufficient for the long haul remains to be seen. Some analysts are openly skeptical.

From Bloomberg:

MBIA Inc., seeking to avert a crippling reduction of its AAA credit rating, will raise as much as $1 billion by selling a stake to private equity firm Warburg Pincus LLC…..Warburg Pincus will buy $500 million of common stock and take up to $500 million in a shareholder rights offering next quarter, Armonk, New York- based MBIA said today.

The added capital may help avoid a cut in MBIA’s AAA credit rating, which is under scrutiny by Moody’s Investors Service, Fitch Ratings and Standard & Poor’s. MBIA stands behind $652 billion of state, municipal and structured finance bonds, and losing the AAA stamp would endanger those ratings. Without the top ranking, MBIA may be unable to guarantee debt, a business that made up 90 percent of revenue last year.

“It’s a positive for the company,” said Rob Haines, an analyst at CreditSights Inc., a New York-based independent bond research firm. While not a “magic bullet,” the capital infusion may stave off a downgrade for now, he said.

Fitch analyst Thomas Abruzzo stopped short of affirming MBIA’s credit rating in a statement today. Fitch will weigh the capital infusion against the added losses and make a decision next week, Abruzzo said. David Veno, a bond insurance analyst at S&P, and Stanislas Rouyer, at Moody’s, didn’t immediately return calls seeking comment.

MBIA is among at least eight bond insurers being scrutinized by the ratings companies. The industry guarantees $2.4 trillion of debt and downgrades could cause losses of as much as $200 billion based on falling values of the debt and increased borrowing costs, according to data compiled by Bloomberg.

Writedowns of the value of the debt MBIA guarantees will exceed the $342 million in the third-quarter and the company will set aside as much as $800 million to cover losses it expects to take on securities backed by home equity loans, MBIA said…

Warburg Pincus, the New York-based firm started in 1971, will initially buy 16.1 million common shares at $31 each. The firm will also receive seven-year warrants to buy stock at $40 and have the right to appoint two directors. Warburg Pincus has $2.7 billion in financial-services investments include Bermuda- based insurers Aeolus Re Ltd. and Arch Capital Group Ltd., and Dime Bancorp, the New York-based parent of the Dime Savings Bank.

MBIA said it still may consider other ways to boost capital, including reinsuring its portfolio or issuing debt or hybrid securities.

MBIA’s top executives, who include Chief Executive Officer Gary Dunton, said they also will buy $2 million of stock at $31.

Credit-default swaps tied to MBIA dropped 95 basis points to 330 basis points, the lowest since Oct. 30, according to CMA Datavision in London. A decline in the contracts, used to speculate on the company’s ability to repay its debt, signals improvement in investor confidence. Contracts tied to MBIA’s AAA rated bond insurer, MBIA Insurance Corp., narrowed 37 basis points to 155 basis points, CMA data show.

Shares of New York-based Ambac Financial Corp., whose debt ratings are also under examination, jumped $2.74, or 10 percent, to $29.58. Ambac, the second-largest bond insurer, is also rated “likely” to need capital by Moody’s…..

MBIA’s announcement of more losses to come raised concerns among analysts that the company may need even more capital.

“The capital raise clearly takes the near-term pressure off MBIA, from a ratings perspective,” Ken Zerbe, an analyst at Morgan Stanley in New York, said in a report to clients. “That said, the size of the expected case loss reserve and the anticipated mark-to-market loss are much greater than expected and bode poorly for the health of the financial guaranty industry.”

Zerbe advises investors avoid financial guarantee stocks for now.

MBIA in October posted a $36.6 million loss because of writedowns on mortgage-related securities and halted stock buybacks to retain capital. So far this quarter, the company “has observed a further widening of market spreads and credit ratings downgrades of collateral underlying certain MBIA-insured CDO tranches,” the company said in today’s statement.

The fair value of the assets slumped by about $850 million in October, MBIA said.

The added losses and capital being set aside for home equity loans may sap the capital being raised, Gimme Credit analyst Kathleen Shanley wrote in a note to clients today.

Egan-Jones Ratings Co. called the $1 billion of capital raising plans “a pittance.” The firm has estimated that MBIA needs to raise about $4 billion of capital. Managing director Sean Egan said that estimate would likely increase given MBIA’s disclosure about expected losses on home equity loan backed securities.

“Given the magnitude of MBIA’s exposures, as demonstrated again this morning with UBS’s writedowns, I don’t see how $1 billion moves the needle,” said David Einhorn, president of Greenlight Capital LLC in New York, which has a short position on MBIA, betting the shares will decline.