While this move by MBIA to increase equity and reserves is hardly adequate to preserve an AAA based on what that rating is supposed to mean, the rating agencies, despite their posturing otherwise, are desperate to avoid downgrading MBIA and Ambac,. This fig leaf may be deemed to be adequate, at least for the next six to nine months. However, Fitch, which has taken a tougher stance than Moody’s and Standard & Poors, is more likely to issue a downgrade, irrespective of this development.
In a sign of the doubts surrounding MBIA, Warburg Pincus is having to backstop the planned sale of preferred stock. This is reminiscent of a trader doubling down, a strategy far more likely to blow up than succeed.
Note that the value of preferred stock presupposed that the preferred dividends will actually be paid. But MBIA is a holding company; the insurance subsidiaries are regulated entities and can upstream cash to the parent only to the extent they are profitable (and then only a percentage of profits is eligible to be dividended up to the parent) or if approved by the regulator.
Eric Dinallo, who is trying to orchestrate the bailout of the bond insurers, regulates MBIA. His priority is protecting the policyholders of the regulated subsidiaries, not the equity investors. Bill Ackman of Pershing Square has repeatedly forecast that MBIA’s holding company will become insolvent as early as June-July, and under a best case scenario, by the end of 2008.
I anticipate Warburg Pincus will wind up owning a lot of this paper.
From MarketWatch:
MBIA Inc. said late Wednesday that it plans to raise $750 million selling new shares to prop up its struggling bond insurance business.
Private-equity firm Warburg Pincus, which has already invested in MBIA , will backstop the sale of 50.3 million new shares by agreeing to buy up to $750 million of preferred stock that may be converted into common stock later, subject to some conditions.
MBIA also said it added $100 million to reserves to cover probable losses on securities backed by prime, second-lien mortgages….
Several bond insurers have begun to lose AAA ratings, imperiling their business models. But some have been trying to keep their top ratings by raising new capital. MBIA has already borrowed $1 billion and a $500 million investment from Warburg closed in late January….
“This is good progress,” New York State Insurance Superintendent Dinallo said in a statement on Wednesday after MBIA’s announcement. “It’s the kind of transaction we’ve been discussing and encouraging.”…
Still, MBIA may still find it tough to maintain its AAA ratings, according to one leading agency.
Fitch said on Wednesday that it may cut MBIA’s AAA rating within four to six weeks because losses will increase materially from the bond insurer’s large exposure to structured finance CDOs, which topped $30 billion at the end of September.
Such losses could threaten MBIA’s AAA rating, regardless of how much capital the bond insurer raises, Fitch warned.
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What’s going on with MBIA is simply amazing. They are going to dilute the common by 1/3rd… hard to believe the stock rallied (though it did cut its gain in half during the post session rally). Seems as if Warburg will do a good amount of back stopping because I can’t imagine there will be strong demand for 3/4s of a billion of common in this company
OT, but related to derivative finance:
1. Experts believe there is going to be a restraint on reinsurance capacity going forward because of supply-side constraints. “GIC is expected to tighten reinsurance rates. Price rationality is bound to prevail sooner than later. The market will be hardening and it will face a correction starting April. This will impact the supply side,” an industry expert said. Already, GIC is only entitled to 10% of the cession by domestic insurers starting April, down from 15% last year.
2. Moved by Allstate Floridian Insurance Co’s request for 43 percent rate increase, a Senate panel subpoenaed company officials to justify the proposed increase, despite a $12 billion expansion of Florida’s hurricane reinsurance pool.
Testifying under oath, Allstate officials said the rate request for Allstate Floridian, an Allstate subsidiary, was needed to shore up rates that were too low when compared to the state’s hurricane risk, especially over the next few years.
“Balancing the need for affordable rates with the need for reliable coverage is no easy task,” Allstate Floridian chief executive Joe Richardson told the panel during the first of two days of hearings.
3. A former top executive for General Reinsurance Corp. e-mailed billionaire investor Warren Buffett in 2000 about a reinsurance transaction with American International Group Inc. that triggered a criminal trial, a government postal inspector testified Tuesday.
The testimony emerged in the second month of a federal court trial of five employees of AIG and General Re, a division of Buffett-led Berkshire Hathaway. Buffett has not been accused of wrongdoing and has said he was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions.
Attempts to contact Berkshire Hathaway on Tuesday for further comment went unanswered. Berkshire has $33 Billion in Goodwill Accounting, which IMHO, present unique opportunities for marking -to-market unobservable Level 3 Assets.