The Wall Street Journal-20080115-Credit Crunch -- Heard on the Street- MBIA Eludes Downgrade but Not Danger- Investors Get Relief From Debt Offering As Hurdles Remain
Return to: The_Wall_Street_Journal-20080115
Credit Crunch -- Heard on the Street: MBIA Eludes Downgrade but Not Danger; Investors Get Relief From Debt Offering As Hurdles Remain
For the first time in weeks, MBIA Inc. investors are breathing sighs of relief after the bond insurer pulled off a big debt offering to help escape a possible credit downgrade.
While the stock is up more than 50% from a 52-week low hit just five days ago, investors should consider a few outstanding issues before getting too comfortable: mounting mortgage-related losses; soaring capital-raising costs; and a tougher playing field for its core business of insuring municipal bonds as well-capitalized newcomers, such as Warren Buffett's Berkshire Hathaway Assurance Corp., line up new clients.
"Nobody knows where the bottom is for this credit cycle, or what the ultimate losses are going to be," says David Havens, a credit analyst at UBS Securities.
That isn't to say investors don't have some reason to cheer. MBIA, whose triple-A rating is under threat of downgrade by rating agencies, could squeak by with a clean bill of health after privately placing $1 billion of bonds in a debt issue last week that MBIA says was oversubscribed -- perhaps because of the 14% yield MBIA agreed to pay.
Warburg Pincus LLC, the private-equity firm that has pledged to commit as much as $1 billion through a share purchase and by backing up a future rights offering, says it is still firmly behind MBIA. "We have been and remain 100% committed to closing this deal," David Coulter, a Warburg managing director, said yesterday.
MBIA also said that it would slash its stock dividend by 62%, which would result in $80 million in cash savings a year, and that it reinsured some of its portfolio, which would reduce its capital requirement by as much as $150 million.
And MBIA's stock looks cheap on a valuation basis. Before Wednesday's $1 billion debt deal, MBIA hit a 52-week, intraday low of $11.11. That was a third of book value, the measure of what is left for shareholders after liabilities are subtracted from assets. Factoring in all of the losses MBIA has reported to date, including mark-to-market losses on its derivatives portfolio, MBIA's book value was about $32 as of Dec. 31.
Now, MBIA is trading at just over half of book value, no doubt galvanizing the conviction of the six out of 11 MBIA analysts who have been clinging onto their "buy" or "strong buy" ratings since the shares were at $65 or higher. In 4 p.m. composite trading on the New York Stock Exchange, MBIA shares were up 2.8% or 46 cents, to $17.05, down 8.5% in the year to date.
But in the current environment, book value is a moving target. The $32 book value assumes no more losses in the future -- an unlikely scenario, especially if there is a recession.
The types of losses MBIA has reported so far indicate a broad deterioration of mortgage credit from risky subprime loans to supposedly less-risky prime home loans. This suggests more losses could come in this year's first quarter.
MBIA expects to incur a total of $737 million of losses in last year's fourth quarter, attributable mainly to its portfolio of home- equity lines of credit and second-lien mortgages. That amounts to about 75% of all the paid losses incurred by MBIA since its inception in 1971, according to UBS's Mr. Havens. "We have many miles to go, fraught with peril," he says.
A spokesman for MBIA declined to comment.
MBIA also has reported mark-to-market losses in its derivatives portfolio amounting to $3.3 billion pretax, or $2.1 billion after taxes. Those are reductions in the fair value of MBIA's credit-default swaps. As defaults have risen in the mortgage-related assets underlying the CDOs, bond insurers have to "mark" them lower to reflect the drop in the policy's value.
The company says the mark-to-market losses aren't a prediction of real future losses and that they don't affect cash earnings. But given the worsening mortgage crisis, those numbers can be a reasonable guide, says Rob Haines, a credit analyst at research firm CreditSights who has a "hold" rating on all the bond insurers. "If those insured bonds are trading at super-distressed levels like this, the likelihood that they're going to collapse increases dramatically."
Investors' confidence in MBIA is fragile these days, and that could affect the coming $500 million rights issue, in which the company will offer shares to existing holders. If they don't fully subscribe to the offering, Warburg would step in.
A lack of investor confidence is evident in the 14% yield MBIA agreed to pay on its $1 billion double-A-rated bond issue last week, more than double the average yield of similarly rated U.S. corporate bonds. And while that is still arguably the cheapest capital the company could raise, it also adds $140 million in annual interest payments.
Some states and municipalities have eschewed bond insurance in recent weeks. Whether they buy again is critical for MBIA's earnings and stock price.
