Bond Insurers have been absolutely crushed by the credit crisis. The two industry leaders Ambac and MBIA have both lost more than 80% of their market value in just over a year. These bond insurers are only as good as their credit rating because, in order to provide insurance bonds, they must keep their AAA credit rating. There has been much speculation that these companies are so heavily influenced by the credit market that the rating agencies could drop their ratings, which would be akin to a death sentence. It would not only have affected MBIA but also the $678 billion of securities they insure.
Today, MBIA’s CEO, Gary Dunton spent a four hour conference call squelching rumors that recent write-downs have crippled the company so much that they would lose their AAA rating. MBIA did disclose that the 4th quarter produced a massive $2.3 billion write-down. There were fears that MBIA would not have enough capital to cover their losses. “The effect of these reserving and impairment activities on our capital position will be more than offset by the successful completion of our capital plan, which will increase our capital position by well over $2 billion,” said Gary Dunton in a statement. MBIA aggressively looked to raise capital in order to maintain its strong Moody’s rating.
The company raised $1 billion dollars through offer of surplus notes. In addition, MBIA also brought in a huge investment through a private placement, possibly one of the largest private placements ever. The transaction was negotiated by private equity firm Warburg Pincus, who will purchase newly issued MBIA shares with $500 million right away with an additional $500 million likely in the future. This type of transaction is often referred to as a PIPE or Private Investment in Public Equity. The great advantage of these transactions is that they are quickly executable and generally not very expensive. PIPE investments are becoming more and more prevalent in the post Sarbanes-Oxley marketplace as a way to simplify the act of raising capital.
It appears that MBIA’s chairman was able to assuage investor’s fears today as shares were up almost 7% today with the help of the two large investments. MBIA has a very strong Ockham rating at present, but that is a factor of their steep decline over the last year which make the shares seem cheap in a historical context. However, there is still plenty of uncertainty in the credit market and Ockham cannot advise going long on monoline insurers until there is a more stable market climate, which may take a good while.
