The MBIA Inc. (MBI:US) bond insurance unit created in 2009 to jumpstart the company’s municipal-debt guarantee business was cut three levels to junk by Standard & Poor’s.
National Public Finance Guarantee Corp. was lowered to BB from BBB with a “developing” outlook, the New York-based ratings company said yesterday in a statement. The MBIA parent company’s B- rating, four steps lower than the insurance subsidiary, was affirmed with a negative outlook.
The downgrade came a day after MBIA, shut out of the bond- guarantee business after backing mortgage securities that soured during the financial crisis, said there is “substantial doubt” about the ability of its MBIA Insurance Corp. unit that insured the debt to continue as a going concern.
While National Public Finance was created to split off its main muni-bond business from those losses, S&P said yesterday that the new unit may not be able to recover about a $1.6 billion intercompany loan to the distressed unit if regulators seize that subsidiary as loss claims erode its capital.
The National unit’s ability to claim its security interest in the loan, “is uncertain,” S&P analysts led by David Veno in New York said in the statement. “We have, therefore, included a 100 percent charge for the intercompany loan in our analysis of National’s capital adequacy.”
The loan, arranged in 2011 to help the MBIA Insurance unit pay settlements on mortgage-backed debt and approved by the New York State Department of Financial Services, is secured by collateral with an estimated value “substantially” exceeding the debt balance, Kevin Brown, a spokesman for Armonk, New York- based MBIA, said in an e-mailed statement.
“Despite S&P’s rating action, National’s capitalization remains consistent with an investment-grade rating even under a highly speculative scenario where its secured loan to MBIA Corp. is not repaid due to regulatory intervention,” Brown said. “National will continue to meet all of its obligations to policyholders.”
MBIA is locked in negotiations to settle lawsuits between it and Bank of America Corp. (BAC:US) The MBIA Insurance unit, from which National was split off, guaranteed contracts protecting Bank of America and its subsidiaries from losses on commercial-mortgage debt. At the same time, MBIA is seeking to force the bank to buy back faulty loans that were included in residential-mortgage securities that MBIA insured.
If the companies can’t reach an agreement, Bank of America could make claims on the commercial-mortgage debt that may leave the MBIA Insurance unit without sufficient funds, MBIA has said.
The New York regulator denied requests in the fourth quarter to draw on the intercompany loan or alternate financing to fund a settlement with a credit-default swap counterparty, the insurer said in its annual report filed Feb. 27 with the U.S. Securities and Exchange Commission.
The company is limited by its liquidity to end transactions, “all of which could be subject to regulatory approval,” MBIA said in the filing. “There can be no assurance that MBIA will be able to fund further commutations by borrowing from National or otherwise.”
MBIA shares (MBI:US) fell 3.1 percent yesterday to $9.67 and are down 12 percent the past two weeks.
The cost to protect against losses on the parent company’s debt for five years with credit-default swaps climbed 2.1 percentage points during the same period to 16.5 percent upfront yesterday, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $1.65 million initially and $500,000 annually to protect $10 million of debt from default.
In a move to prevent the parent company from being dragged into bankruptcy by the insurance unit, MBIA last year asked bondholders to alter the terms of its bonds. After Bank of America bid to buy some of the debt to block the amendment, the insurer purchased about 52 percent of the securities in order to ensure it had sufficient support.
Bank of America sued the debt insurer in December, saying it interfered with the tender offer for the securities involved in the consent solicitation. It’s also claiming the insurer defaulted on the debt.
“We strongly believe the consent was successfully accomplished and the change was made,” MBIA Chief Executive Officer Jay Brown said yesterday in a conference call with investors and analysts. “It’s not going to be drawn out for a long period of time. Answers will happen in the next few months.”
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