Bloomberg News

MBIA Credit-Default Swaps Tumble on Morgan Stanley Settlement

December 14, 2011

Dec. 13 (Bloomberg) -- The cost to protect debt tied to MBIA Inc. fell after it reached a settlement with Morgan Stanley to terminate credit-default swap contracts that led to billions of dollars of losses for the bank and to drop a challenge to the insurer’s restructuring.

Credit-default swaps on the MBIA unit that sold the guarantees declined 8.6 percentage points to 36.1 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $3.61 million initially and $500,000 annually to protect $10 million of MBIA’s debt for five years.

Contracts on Morgan Stanley debt also dropped as the agreement was announced. That contrasted with a rise in a benchmark gauge of U.S. corporate credit risk after the Federal Reserve took no new actions to lower borrowing costs after its policy meeting.

“This settlement is good for Morgan Stanley, good for MBIA and good for the markets and our financial system, allowing firms to move forward and rebuild,” Benjamin Lawsky, New York state’s financial services superintendent, said in a statement today.

Contracts on Morgan Stanley fell 7.3 basis points to 417.5 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Cash Payment

MBIA, based in Armonk, New York, will make a $1.1 billion cash payment to Morgan Stanley as part of the settlement, according to a person familiar with the agreement who asked not to be named because the amount hasn’t been made public. Morgan Stanley will take a $1.2 billion loss this quarter related to the deal, the New York-based bank said today in a statement. Kevin Brown, a spokesman for MBIA, declined to comment.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.8 basis points to a mid-price of 127.3 basis points at 5:01 p.m. in New York, according to data provider Markit Group Ltd. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The Federal Open Market Committee said at the conclusion of its meeting today in Washington that the U.S. economy “has been expanding moderately, notwithstanding some apparent slowing in global growth.” The central bank added that the unemployment rate “remains elevated.”

Rate Swaps Widen

The swaps index, which typically rises as investor confidence deteriorates and falls as it improves, has decreased from 146 on Nov. 25 as traders bet European leaders will prevent the region’s crisis from tainting bank balance sheets globally. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Interest-rate swap spreads, a measure of stress in credit markets, widened for a third day. The difference between the two-year swap rate and the comparable-maturity Treasury note yield expanded 0.15 basis point to 46.09 basis points, according to data compiled by Bloomberg. The measure increases when investors favor the perceived safety of government bonds.

Near-term refinancing risk for global high-yield issuers is moderate, as less than 30 percent of the $350 billion in junk debt matures in the next two years, according to Moody’s Investors Service. While risks are benign for the U.S., the region has the highest number of CCC or lower rated debt coming due in the next four years.

High-yield bonds are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.

--With assistance from Shannon D. Harrington and Michael J. Moore in New York. Editors: John Parry, Pierre Paulden

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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