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After Reading the Prospectus and Reviewing Potential Losses, Would You Buy These Notes? |
| Written by Reggie Middleton | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Thursday, 17 January 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This is from MBIA's recently published 8k. If you have not done so already, it is strongly recommended that you read the November blog post: Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton. Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant On January 16, 2008, MBIA Insurance Corporation (“MBIA”), a wholly-owned subsidiary of MBIA Inc. (the “Company”), issued $1.0 billion principal amount of Surplus Notes due January 15, 2033 (the “Notes”) with an initial interest rate of 14 percent until January 15, 2013 and thereafter at an interest rate of three-month LIBOR plus 11.26 percent. As a point of reference:
The Notes were issued pursuant to the Fiscal Agency Agreement, dated January 16, 2008 (the “Fiscal Agency Agreement’), entered into between MBIA and The Bank of New York (“BONY”), as fiscal agent (the “Fiscal Agent”), in an offering exempt from the registration requirements of the Securities Act of 1933, as amended. The Notes are subordinate in right of payment to all existing and future debt issued, incurred or guaranteed by MBIA, 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. Each payment of interest on or principal of the Notes (including upon redemption) may be made only with the prior approval of the New York Superintendent of Insurance and only out of surplus funds available for such payments under the New York Insurance Law. MBIA has the option to redeem the Notes in whole or in part on January 15, 2013 and the interest payment date occurring in January of each fifth succeeding year thereafter at a redemption price equal to the principal amount of the Notes to be redeemed together with any accrued and unpaid interest to the redemption date, and on any other date at a “make-whole” redemption price set forth in the Notes. The Notes do not include any restrictive covenants. In the event of MBIA’s rehabilitation, liquidation, conservation or dissolution, the Notes will immediately mature in full without any action on the part of the fiscal agent or any holder of the Notes, with payment thereon being subject to the satisfaction of the conditions to payment described herein. In no event shall the Fiscal Agent or any holder of the Notes be entitled to declare the Notes immediately mature or otherwise immediately payable. The Bank of New York has from time to time engaged in, and will continue to engage in, banking and other commercial dealings in the ordinary course of business with MBIA and its affiliates. The Bank of New York has received, and will continue to receive, customary remunerations with respect to these transactions.
From my second blog post on MBIA (the Scary Halloween Story) and the monolines dated Tuesday, 13 November 2007... Being so sensitive and exposed to CDOs, one would be curious as to what happens if the CDO spreads widen. Well…
To put this into perspective, let me show you the entire sensitivity grid. Hey, no matter which way you look at, these guys are at risk. They have $6,800 in capital. Just move your finger over any combination of CDO duration and spread in basis points, and if you come close to that 6,800 figure, bingo! The current duration average is approximately 5 years. So the question is, "Will spreads reach 104, or more?" Well, look at the charts above that I posted from Pershing. Better yet, look at the subprime underlyings performance, which can be mimicked by the ABX from markit.com. Horrendous, indeed.
______________ So, knowing what you know now... Would you buy these notes, even at 14%???
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Comments (11)
  written by Reggie Middleton, January 17, 2008
I am not aware of it. My teams are stretched thin working on the I banks and CRE. The failure of any of the larges monolines will hurt the I banks HARD. Read the bank, broker and bullsh1 series, primarily model risk and counter party risk.
So, your comment is basically what we've been working on. There is a lot of BIG money CRE coming up for refinance, and the CMBS market is dying off fast. These guys can't access the case they need at the terms they can handle. With the recent developments (you didn't hear this from me), the GGP analysis is too conservative and it is being tweaked and adjust now. I will post on two I banks over the next few days as well.
 written by Jon Pearlstone, January 17, 2008
Just FYI -- but if you have a reaction please share--hey-- my 1st chance to update you on something!
HSBC?s monoline bailout: MBIA saved by? a CDO Bloomberg reported -via the wires- on Tuesday: Jan. 15 (Bloomberg) ? HSBC Holdings Plc, Europe?s biggest bank by market value, set up a collateralized debt obligation to repackage so-called surplus notes sold by insurance companies to bolster capital, according to Standard & Poor?s. HSBC?s CDO will be denominated in pounds and sold through a company called Starts (Ireland) Plc, according to an S&P report. Surplus notes are bonds issued by insurance companies that U.S. regulators consider equity. MBIA Inc., the largest bond insurer, last week sold $1 billion of the securities to stave off a downgrade of its insurance unit. The Armonk, New York-based company paid a yield of 14 percent on the notes that are the last to be paid before equity investors in the event of bankruptcy. Notice also that bond insurers are referred to in the plural, so could the Starts CDO be looking to buy-up rickety, emergency debt issues from other monolines? How on earth does this fly? Bloomberg again: The securities will carry the top investment-grade credit ratings, S&P said. HSBC will enter into an agreement with bond investors to protect them against currency swings, the surplus notes defaulting or declining in value. In other words, HSBC are insuring (using swaps) this CDO?s monoline-bond-backed notes, and by doing that, propping up the monoline. In a way, it?s clever because from HSBC?s point of view, they?ve saved the bond insurer, without actually paying for it (not yet, anyway). And by doing so, HSBC has also decreased the likelihood of the swaps being triggered anyway. If the monolines hit trouble again in the future, HSBC could happily allow them to sell more subordinated debt to the CDO. In doing so, those CDS swaps need never be triggered. For investors in the CDO, they?ll get high-returns (the MBIA bond was sold at 14 per cent) and downside protection from HSBC. Win win! ?or possibly, if this fills you with unease and suspicion, not.
written by Capital Gain, January 18, 2008
I've been short DSL since 40 and was getting antsy to cover some - until today. I'd like to hear what banks are most exposed to a MBI or ABK collapse.
written by Capital Gain, January 18, 2008
Also, what kind of so called AAA rated company has to pay 14% for money, and how the hell does a company come out of nowhere with a $32 per share loss and avoid an SEC raid on their offices?
written by Reggie Middleton, January 18, 2008
Don't worry. We're working on that. We already have a short list, just want to finish up on the commercial reit and I banks.
written by Reggie Middleton, January 18, 2008
RE: HSBC
I'm going to bring this up in the institutional group. I assume they hedge by shorting the monolines, but that can only go so far, with CDS prices more realistic, if not overpriced, the same with puts and scarcity of stock available to short. This is scheme to avoid market pricing, again - plain and simple.
written by Mark Edmunds, January 18, 2008
Moodyszero. Great post on the MBIA/HSHC CDO tangled web. Very entertaining. More stuff for the "other things of mystery and myth" bucket?
written by Jon Pearlstone, January 19, 2008
Reggie
In light of the Fitch downgrade of Ambac yesterday, and the many downgrades still to come, I am trying to determine the impact of all this on the Muni Bond Market. Obviously, the ratings of the insured bonds will fall as they are downgraded, but I am thinking that this will create great fear in muni bond investor's minds because they invest for the absolute safety that only a AAA Insured rating used to provide. I have read prospectuses for some of these bonds and it's almost impossible to find the UNDERLYING rating in them. Sometimes I can, sometimes I cannot. I believe that these downgrades could create a huge selloff in high grade munis because of this loss of insurance and more importantly, the loss of trust in the safety of these bonds. Here are my questions for you: 1) I have read that the Housing nightmare threatens many municipalities financially, clearly this seems to be happening at least in California and Nevada already. If cities run into financial difficulties, won't this lead to REAL defaults in the muni bonds they have issued or are Muni bonds payments somehow "reserved" by the municipalities thus ensuring they will cover their payments. Some bonds I have studied say they are "prefunded". Bottom line: Will their be an increasing number of REAL muni defaults, further contributing to the liabilities of the monos? 2) Assuming the strength of the municipality directly effects the REAL underlying rating of their Muni Bonds, How would one go about determining which muni bonds are truly safe and will be paid back once all bonds are exposed for their true underlying ratings once the farce of "insurance" is removed? Are municipalities audited and is credible financial info available to study them? My experience is that most cities are run to well fiscally, but that's just me. 3) If any of the above is accurate and their is indeed a pending muni bond market collapse, is there some way to "short" muni bonds to hedge against this crash (translated--PROFIT from it) I see Van Eck and Lehman have started ETFs for munis that I wonder if you could short, but perhaps there is a better way through some sort of options or futures route??? 4) Any other risks going on here that I am missing? I realize the ratings downgrades severely threaten the Banks and IB's, but what other shockwaves could the unsuspecting public be in for. I realize these questions may not be directly in line with your research, but maybe you could share any thoughts you have and direct me to where I can pursue further answers? as always thanks for the great work you do.
written by Jon Pearlstone, January 19, 2008
should say my experience is that most cities AREN'T run too well
written by Reggie Middleton, January 19, 2008
Well, as you can probably guess, I am an equity guy, not a muni guy. I price myself on a global macro approach, so I will try to monetize any idea, but mine is the last opinion you should be listening to when it comes to munis.
I did warn a few months ago that municipalities were going to start admitting to some real pain which would be a sticking point for the monolines in addition to the structured/mortgage stuff - and that has already started, but as for the more specific linking to the overall markets, I prefer not to comment publicly. I know that the field is too varied to pigeon hole, but the general obligation bonds of the weaker municipalities is what I would look into first. Very good post, I just don't have all the answers for it.
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I read that these MBIA bonds were purchased by a CDO put together by HSBC -- do you have any info on that and if accurate, how could that CDO impact HBSC, today from a balance sheet standpoint as well as longer term in terms of the fact these bonds are likely to be nearly worthless in the not to distant future.
thanks