MBIA Plunges on Recap and Dividend Cut

123jump.com Staff
09 Jan, 2008
New York City

MBIA, the bond insurer, suffered one of the worst losses today after it revealed a plan to raise $1 billion and cut quarterly dividend to 13 cents from 34 cents. MBIA has suffered heavy losses related to asset based lending and sub-prime lending. The company hopes that this recapitalization move will save its AAA rating. In total $652 billion of bonds could suffer in value if MBIA loses its AAA rating.

[R]11:00AM New York – MBIA fell sharply after it plans to raise $1 billion in capital.[/R]

Dow Jones Industrial Average rose 49.58 to 12,640.77, Nasdaq increased 7.81 to 2,448.61, S&P 500 gained 4.76 to 1,394.95.

MBIA ((MBI)) fell 11% or $2.39 to $11.64 after it said that it will cut dividend to 13 cents from 34 cents.

MBIA will raise $1 billion to meet capital requirements of rating agencies to maintain AAA rating. The notes are callable at par at the Company’s option on the fifth anniversary of the date of issuance and every fifth anniversary thereafter.

The press release added that, “The notes will be subordinate in right of payment to all existing and future debt issued, incurred or guaranteed by the Insurance Company, all existing and future claims of policyholders and beneficiaries and all other creditor claims which have priority over claims with respect to the notes under New York insurance law, other than any future surplus notes or similar obligations.”

The company also confirmed that capital infusion plan from private equity company Warburg Pincus is still on track.

The Warburg Pincus investment announced on December 10, 2007. As announced, Warburg Pincus has committed to invest $500 million in common equity at $31 per share and to backstop a $500 million rights offering to the Company’s existing shareholders.

Warburg Pincus will also receive warrants to purchase additional shares at $40 per share. The Warburg Pincus investment is proceeding according to plan, with the common equity investment currently expected to close in January 2008 and the rights offering expected to close in February 2008.

MBIA estimates that it will incur a total of $737 million in loss and loss adjustment expenses for the fourth quarter of 2007. These expenses consist of fourth quarter case loss activity of approximately $614 million and $123 million in unallocated loss reserve activity. The approximately $614 million case loss activity is principally related to MBIA’s insured securitizations of prime home equity lines of credit and prime closed-end second-lien mortgages.

MBIA’s $214 million total unallocated loss reserves at September 30, 2007 will increase with the addition of approximately $23 million, reflecting the regular quarterly addition of 12 percent of scheduled earned premiums, and the special addition of $100 million to reflect MBIA’s estimate of losses that are probable to occur as a result of the potential for adverse developments in the real estate market related to prime, second-lien mortgage exposure, but which have not yet been specifically identified.

The non-cash pre-tax change in fair value of insured credit derivatives (“mark-to-market”), under generally accepted accounting principles, between September 30, 2007 and December 31, 2007 is estimated to be a loss of $3.3 billion. The non-cash after-tax mark-to-market loss is estimated to be $2.1 billion. These preliminary mark-to-market estimates are subject to adjustment. Of this $3.3 billion mark-to-market loss, approximately $200 million represents estimated credit impairment related to three CDO-squared transactions that MBIA expects to incur actual claims in the future.