Bloomberg News

MBIA Credit Swaps Drop as UBS Said to Settle Restructuring Fight

March 15, 2012

The cost to protect against a default by the MBIA Inc. (MBI) unit that guaranteed toxic mortgage debt dropped after UBS AG (UBSN) was said to have agreed to settle claims challenging the bond insurer’s 2009 restructuring.

Swaps tied to MBIA Insurance Corp. declined three percentage points to 26.7 percent upfront, the lowest in more than two weeks, according to data provider CMA. That’s in addition to 5 percent a year, meaning it costs $2.67 million initially and $500,000 annually to protect $10 million of MBIA Insurance’s debt.

UBS will withdraw from litigation in New York State Supreme Court in which banks claim the insurer’s restructuring left it insolvent, according to a person familiar with the matter, who declined to be identified because he wasn’t authorized to speak publicly.

Switzerland’s biggest lender is one of four remaining banks in the lawsuit that had bought default protection from MBIA against losses on mortgage-linked debt. Fourteen other firms dropped out of the suit, including Morgan Stanley and Barclays Plc after settlements that terminated their hedges with MBIA.

UBS (UBS) said in its annual report today that it lowered its 2011 net trading income by 167 million Swiss francs ($180 million) and booked a tax benefit of 28 million francs after agreeing to settle credit-default swaps with a monoline insurer in exchange for a cash payment. The Zurich-based bank didn’t disclose the name of the insurer.

Contracts on MBIA Inc. also declined, easing 1.4 percentage points to 13.3 percent upfront, the data show.

Market Benchmark

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

Kevin Brown, a spokesman for Armonk, New York-based MBIA, and Tatiana Togni, a spokeswoman for UBS, declined to comment. MBIA attorney Marc Kasowitz didn’t immediately respond to a phone message and e-mail seeking comment.

Swaps on MBIA dropped as a benchmark gauge of corporate credit risk broke below 90 basis points for the first time since July, two days after the Federal Reserve raised its assessment of the economy. The Markit CDX North America Investment Grade Index tied to 125 companies in the U.S. and Canada fell 0.9 basis point to a mid-price of 90 basis points at 5:24 p.m. in New York, according to Markit Group Ltd.

Jobless Claims

The gauge, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, reached an eight-month low after U.S. economic reports showed initial jobless claims dropped last week to match a four-year low and U.S. consumer confidence rose to the highest since 2008, signaling an improving labor market may boost household spending.

The swaps index, which typically falls as investor confidence improves and rises as it deteriorates, touched 89.4 basis points, the lowest intraday level since July 1. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The cases are ABN AMRO BANK NV et al v. MBIA, 601475-2009, and ABN AMRO BANK NV et al v. Eric Dinallo, 601846-2009, New York State Supreme Court (Manhattan).

To contact the reporters on this story: Mary Childs in New York at mchilds5@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net

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


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