MBIA On the Edge of a Cliff

MBIA Position `Tenuous' After Moody's Downgrade, Fitch Says
By Christine Richard
June 27, 2008 12:55 EDT

June 27 (Bloomberg) -- MBIA Inc. faces a ``tenuous situation'' as the bond insurer seeks to cover payments and collateral calls on $7.4 billion of securities triggered by a credit-rating downgrade, Fitch Ratings analyst Thomas Abruzzo said.

MBIA may need to tap assets pledged to back other commitments as it comes up with the money, potentially opening the company up for further downgrades, said Abruzzo, who yesterday withdrew his rating on MBIA and Ambac Financial Group Inc. after the companies refused to give him information.

MBIA, based in Armonk, New York, is being forced to post collateral and make payments to some investors after Moody's Investors Service cut its insurance rating five levels to A2 from Aaa last week. Some of that money may come from assets backing an $8.1 billion medium-term note program, potentially creating a new liability for MBIA's insurance company, Abruzzo said. MBIA may be forced to sell some securities at a loss to fund the collateral payments, he said.

``It exposes the company to event and market risk,'' Abruzzo said in a telephone interview. Abruzzo cut MBIA to AA from AAA in April. ``It wasn't something that was envisioned when the company was AAA with a stable outlook.''

Jim McCarthy, a spokesman for MBIA, said he didn't have an immediate comment.

``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.

Global Funding

In addition to its main business of insuring bonds, MBIA also manages assets for clients such as municipalities.

The asset management unit issued guaranteed investment contracts and medium-term notes, which carried AAA ratings because they were backed by the company's insurance unit, according to company filings. The unit makes a profit by investing in lower-rated securities that have higher yields, filings show. The downgrade of the insurance subsidiary triggered provisions in the investment contracts requiring MBIA to post collateral or repay investors, who include cities and states.

The asset management unit has $15.2 billion ``available to satisfy'' the demands, the bond insurer said in its statement. Those assets, though, also back the medium-term note program run by MBIA Global Funding LLC, the filings show. Taking $7.4 billion as collateral and cash payments would leave $7.8 billion to back the $8.1 billion program, a gap of $300 million that could widen if assets are sold at a loss, Abruzzo said.

``It's a concern that the liquidity in the asset management business has been further encumbered,'' Abruzzo said. ``It's a bit like robbing Peter to pay Paul. Ultimately, the insurance company is on the hook for any shortfalls.''

`Volatile' Credit

Abruzzo said he withdrew all his ratings on MBIA and Ambac because the companies refused to provide him private information, making it impossible for him to accurately rate them. MBIA said Fitch directly rated only about 30 percent of its portfolio so couldn't produce accurate assessments of its potential writedowns.

The recent downgrades ``impact the companies' business prospects and the companies' reactive strategic and capital management planning creates a volatile credit variable,'' Abruzzo said in the report.

Should MBIA's ratings fall to BBB or lower, the guaranteed investment contracts terminate and MBIA would be forced to repay holders.

Standard & Poor's, which cut MBIA's insurance unit to AA from AAA on June 5 and is reviewing it for another downgrade, isn't concerned about the holding company's liquidity, David Veno, an S&P analyst said in an e-mailed statement.

Even if MBIA is required to sell assets, Veno said he's not concerned ``given the apparent strong quality of the investments.''

Moody's spokesman Abbas Qasim said no one was available to comment.

Regulators

At the end of the first quarter, 48 percent of the assets backing the medium-term notes and investment contracts were invested in corporate bonds, 11 percent in asset-backed securities and 8 percent in non-agency residential mortgage backed securities, according to an MBIA presentation on May 12. About 20 percent of the assets were insured by MBIA or another bond insurance company, also according to the presentation.

The New York State Insurance Department is also monitoring the possibility of a claim on the insurance unit to make up a shortfall in the medium-term note program, Deputy Superintendent Michael Moriarty, said in an e-mailed statement.

Further ratings cuts or a slowing economy which ``may adversely impact the investment portfolio, could stress the asset-liability match of MBIA's investment management business,'' Moriarty said.

MBIA has an additional $1.4 billion of cash at the holding company that could be used to cover shortfalls, the company said last week. That includes $900 million it decided against giving to its insurance unit to shore up its capital after Moody's said it was likely to downgrade the insurer regardless.