MBIA Inc. (MBI:US) fell the most in 11 months after the bond insurer said a regulator hasn’t decided whether to allow a unit that backed soured mortgage debt to make an interest payment on notes next week.
The insurer dropped (MBI:US) as much as 12 percent to $9.35 after it said in a regulatory filing (MBI:US) that the New York State Department of Financial Services hasn’t approved a July 16 payment by the MBIA Insurance Corp. unit on its 14 percent surplus notes maturing in 2033. The shares pared the loss, trading at $9.66 at 4:15 p.m. in New York, as MKM Partners LLC analyst Harry Fong said the delay doesn’t harm the company or policyholders.
The announcement may have fueled concern that the insurance unit’s financial standing is worse than investors had anticipated, adding support to banks that are challenging a 2009 restructuring of Armonk, New York-based MBIA, Fong said in a note recommending that clients buy amid the decline. No cash is due from the unit if the regulator doesn’t approve the step, meaning a missed payment wouldn’t be a default, MBIA said.
“MBIA filed to have this payment approved more than a month ago and has the liquidity to make the payment,” Fong said. “While we do not know what the NYSDFS will ultimately decide, we believe that its decision will have little bearing” on the restructuring case, he wrote.
The guarantor sold the notes in 2008 to bolster capital amid soaring defaults on subprime home loans, delaying a reduction of its then-top credit ratings. Surplus notes are bonds issued by insurance companies that state insurance regulators consider equity. In the event of a bankruptcy, the notes are repaid after other creditors and before stockholders.
Kevin Brown, an MBIA spokesman, declined to comment further.
MBIA, which was shut out of the business of backing municipal debt because of the losses on home-loan and commercial-mortgage securities, split its MBIA Insurance subsidiary in 2009 with the blessing of the regulator in an effort to revive the muni business.
Lenders including Bank of America Corp. and Societe Generale SA, which bought protection against losses on mortgage- debt from MBIA, sued the insurer and regulator to reverse the split. That case is now being considered by a New York State Supreme Court judge after a four-week trial that concluded June 7. The banks claimed the restructuring exposed policyholders to losses by transferring $5 billion in assets out of MBIA Insurance and into the municipal unit.
If the regulator doesn’t approve the interest payment, “the company’s policyholders would benefit, as there would be an extra $60 million to $70 million at the insurance subsidiary,” Fong wrote.
Ronald Klug, a spokesman for the department, declined to comment. Robert Giuffra, a lawyer with Sullivan & Cromwell LLP who represents the banks suing the insurer, didn’t immediately return phone and e-mail messages. A separate lawsuit filed against MBIA in New York state court over the split is pending.
The MBIA Insurance unit now carries speculative-grade ratings from both Moody’s Investors Service and Standard & Poor’s.
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