MBIA Debt Rating Cuts Prompt $7.4 Billion of Payments (Update2)
By Christine Richard
June 23 (Bloomberg) -- MBIA Inc.'s credit rating downgrade by Moody's Investors Service is likely to trigger $7.4 billion of payments and collateral postings.
The company's stock dropped 13 percent on June 20 after Moody's reduced MBIA's insurance financial strength rating five levels to A2 from Aaa. Armonk, New York-based MBIA issued a statement June 20 saying it had $15.2 billion of assets to meet the posting requirements.
The payments are required for the company's asset-management unit, which oversees $25 billion for investors, including municipalities. After the downgrade, MBIA's asset management business is on the hook to protect the value of guaranteed investment contracts, or GICs, by posting collateral. The obligation highlights another part of MBIA's business that has come under stress since the collapse of the subprime mortgage market.
``MBIA is leveraged through their own rating and that can make a downgrade very harsh,'' said Matt Fabian, a senior analyst with Municipal Market Advisors. ``It's very hard for an outsider to piece together the impact of these downgrades.''
MBIA's assets include $4 billion in cash and short-term investments, $1 billion of unpledged collateral and $10.2 billion of other securities, MBIA said.
MBIA fell 17 cents, or 3 percent, to $5.42 a share as of 10:28 a.m. in composite trading on the New York Stock Exchange.
In its report downgrading the debt, Moody's said MBIA faced payments and collateral calls triggered by the reduction. MBIA this month decided against giving $900 million to its insurance unit. While that contributed to the downgrade of the subsidiary, the money now puts the parent company in a stronger position, Moody's said last week.
Sufficient Assets
``We have more than sufficient liquid assets to meet any additional requirements arising from any terminations or collateral posting requirements,'' MBIA said in a statement last week in response to the Moody's downgrade.
The guaranteed investment contracts are used by cities, states and investment securities in lieu of bank accounts. They require MBIA's holding company to post collateral against the contracts if its insurance unit's credit rating is cut as far as A2, according to company filings.
The collateral call puts the spotlight on MBIA's expansion into the asset management business, a venture that combined money management with a guarantee from its insurance unit. While MBIA's insurance company has agreed to pay any cash shortfalls on the GIC contracts, it's up to MBIA's holding company to restore the value of the underlying securities now that the insurance unit has been deemed less creditworthy.
Credit-Default Swaps
MBIA is among companies holding talks to tear up credit- default swap agreements totaling $125 billion in return for payments to the banks that hold the insurance contracts, the Financial Times reported today, without saying where it got the information.
Credit-default swap sellers on June 20 demanded 38.5 percent upfront and 5 percent a year to protect MBIA's insurance unit from default for five years, according to broker Phoenix Partners Group in New York. The upfront requirement rose from 31.5 percent the previous day.
Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net
Last Updated: June 23, 2008 10:30 EDT
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